LONDON, UK / ACCESSWIRE / October 24, 2018 / For stock market investors, especially those with a preference for technology plays, September 2018 brought arguably the most significant change in two decades: S&P Dow Jones Indices implemented previously announced revisions in the Global Industry Classification Standard (GICS) structure. As a result, one of the key benchmarks for the broader equity market, Standard & Poor’s 500 Index (S&P 500), no longer has a Telecommunication Services sector. It has now become Communication Services and has absorbed some of the biggest names in technology, namely Facebook, Netflix, and Google parent Alphabet. These three companies, along with Apple and Amazon, have become synonymous with the might of the tech industry, which previously accounted for about 26% of S&P 500. Collectively known as FAANGs, these stocks have fueled the bull market of recent years, and little is expected to change for them in terms of fundamentals and growth prospects. The impact of the changes will be mostly felt by investors as the shift prompts a re-evaluation of portfolio compositions and affects other stocks in their sector, comments leading UK-based investment broker FidLo International.
Apple and Amazon continue in their respective sectors, Technology and Consumer Discretionary. Facebook and Alphabet have been moved from Technology, while Netflix has been transferred from Consumer Discretionary. ”The changes are a step toward acknowledging the convergence of telecommunications, media, and select internet companies and the overlapping services rendered by these companies, within the GICS Structure,” as explained by S&P Dow Jones Indices. So profound a move will undoubtedly have implications for the stock market and, to some extent, the FAANGs themselves, FidLo International notes. According to the majority of analysts, the most likely outcomes in the near future are a surge in tech shares buying and a positive impact on the Communication Services sector due to the addition of Netflix and Alphabet. In the first case, stock acquisitions will be driven by the need to rebalance portfolios, while the second scenario could see the two FAANGs spur interest in some media companies.
Given the popularity of tech companies with investment managers, the S&P 500 changes will call for the adjustment of holdings. Commenting for CNBC just before the overhaul was effected, Jefferies equity strategist Steven DeSanctis said, “What you look at is managers have to look at where they’re positioned versus their benchmark, and they can only be overweight or underweight by a certain amount. Large growth guys are going to underweight traditional tech. Small-cap growth guys have a big overweight in software.” According to CFRA investment strategist Lindsey Bell, the newly created S&P 500 sector combines high-growth technology companies and established value plays such as telecoms, which should reduce volatility significantly. ”Rebalancing is likely to drive incremental flows into companies including Discovery Inc, CBS Corp, and Google parent Alphabet Inc,” Bloomberg wrote on the day the changes were implemented, citing a note by JPMorgan analysts.
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SOURCE: FidLo International