BHP: the giant in the Aussie 200 index

BHP: Founded in 1885, and now one of the world’s largest mining companies, with fingers in many commodity pies including iron ore, coal, petroleum, copper, nickel & uranium.

Over the years, they’ve had a hand in almost every commodity market. 2021 has been an up and down year for the share price.

After a strong run at the end of 2020, BHP rallied further early in 2021 before running out of steam, then giving it all back and a little more.

Change is afoot.

BHP has decided to unify its dual-corporate structure (UK & Australia) and shift the primary stock market listing to Australia.

Note: the deal is still subject to formal shareholder agreement although it’s widely expected to be supported.

And this brings us to the crux of the matter.

• BHP is already a fairly large component of the Australian 200.
• As a market-capitalization weighted index, BHP’s full ~$200 billion valuation could see it become the largest stock in the Aus 200.
• Morgan Stanley estimates that BHP will go up from being 5.7% to 9.5% of the Index!

And if we take a look at the factsheet, we can see that the materials sector is second only to the financial sector....

After BHP’s unification, Morgan Stanley expects Financials to remain the largest sector at 28.22% (down from 29.1%) with materials increasing their sector weight from 18.6% to 21.83%.

Why does this matter?

Let’s compare the Australia 200 with BHP over the course of 2021

Now, this is far from technical analysis (hopefully that’s obvious!). These doodles are to highlight the difference between the behaviour of the two markets.

In the bottom pane, we can see that BHP has struggled. After consolidating in Q1 & Q2, the price fell sharply in Q3. In contrast, the Aussie index pushed on early in the year, before pulling back somewhat and consolidating.

Why is this important?

Well, if BHP’s weighting increases in the Aus 200, then the index will be increasingly influenced by the performance of that one stock. A very bad day for BHP could mean a bad day for the index as a whole (or a good day, let’s not be pessimistic!)

1. The financial sector will play a big role too, with CBA (Commonwealth Bank Australia), Westpac and NAB (National Australia Bank) accounting for over 15% of the index.
2. CSL (healthcare sector) weighs in at just over 6.5%

Good and bad earnings reports for these companies can set the tone for the whole index. The same applies when there are strong or weak periods for the materials and financial sectors as a whole.

Note the very low weighting of the IT & Communication services sectors too. Compare this to the US’ S&P 500, where tech firms dominate (Apple, Microsoft, Amazon, Google make up around 20% of the index).

Summing up, if you’re going to trade the indices, keep an extra close eye on the most influential stocks as these can have an outsized impact on the value and behaviour of the index.

Not investment advice. Past performance does not guarantee or predict future performance.