Expected Deletions to S&P/TSX Raising Concerns

by: FP Trading Desk

Standard & Poor’s is expected to announce the companies that will be added and deleted from the S&P/TSX composite index on or before Friday, Dec. 12. However, the large number of names expected to go as a result of the market meltdown is raising some concern.

The unprecedented number of index deletions will surely put some pressure on the index committee to make special considerations to their methodology, said Yin Luo, managing director of quantitative research at Macquarie Capital.
Changes to the index are based on factors such as trading volume, float turnover, number of transactions, price and weighting in the index.

There are currently 241 members in the index but if two are added and 21 are removed as Mr. Luo anticipates, that number would fall to 222. In 2002, the TSE 300 was renamed and its membership has since fluctuated from between roughly 220 and 280 companies.

Mr. Luo said:

When the market was going good, companies – especially smaller-cap, mining and energy companies – made the list. Now, given the recent volatility it’s likely companies are at risk of being removed.

While the index is purely rule-based and its committee rarely makes any exceptions, it is among several global index providers such MSCI, FTSE and Russell that face similar pressure from investors who want changes as a result of the huge equity sell-off.

Many of them will face lots of deletions, Mr. Luo noted, adding that at least for this quarter, the likelihood of changing the index rules is very small. “In our opinion, there will be enough breadth in the TSX index even after these potential deletions,” he said.

The only exception S&P has made in the past few years was the inclusion of Tim Hortons Inc. (THI). It is a U.S.-domiciled company but was founded in Hamilton, Ontario and has a major presence in Canada.

Mr. Luo said Storm Exploration Inc. (OTC:STXPF) and Ritchie Bros. Auctioneers Inc. (NYSE:RBA) are the only companies that currently meet the addition criteria, while 21 failed to meet the minimum market capitalization. His list of potential deletions includes names ranging from NovaGold Resources Inc. (NYSEMKT:NG) and Compton Petroleum Corp. (CMZ) to ACE Aviation Holdings Inc. (OTC:ACEAF) and DundeeWealth Inc. The changes will take effect after market close on Friday, Dec. 19.

First Calgary Petroleums Ltd. was removed from the index on Nov. 24, while an announcement from BCE Inc. (NYSE:BCE) two days later put its privatization deal into serious doubt.

Scotia Capital analyst Darwin McGrath expects Ritchie Bros. will be added, citing MI Developments Inc. (MIM), Atlantic Power Corp. (OTC:ATPWF), Storm Exploration, First Capital Realty Inc. (OTC:FCRGF) and Aurizon Mines Ltd. (AZK) as contenders. He also listed 21 companies that are expected to go.

Meanwhile, with BCE, Lundin Mining Corp. (LMC), Nortel Networks Corp. (NT), Uranium One Inc. (OTC:SXRZF), Inmet Mining Corp. (OTC:IEMMF), NOVA Chemicals Corp. (NCX) and MDS Inc. (MDZ) candidates for removal from the S&P/TSX 60 index due to corporate actions or index adjustments, the analyst’s top candidate for inclusion is Metro Inc. (OTCPK:MTRAF).

The utilities and industrials sectors follow staples in terms of being most underweight in the TSX 60, so if the index committee wanted to add a non-staples name, Mr. McGrath said it would likely be Canadian Utilities Ltd. (CDUTF.PK) or Finning International Inc. (OTCPK:FINGF).