The MSCI World Index and its effects. (NESTLE)

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What a week for Nestle investors (and the traders who got in later). For awhile there, it looked as if the moon was really the limit for the company.

They are a few factors that give rise to this, but in my opinion, the main reason is due to its addition to the MSCI World Index.

The MSCI World index represents large- and mid-capitalization stocks across 23 developed markets around the world. It covers about 85% of the free float-adjusted market capitalization in each of its constituent countries.

Now, this is a relatively popular Index that is used to create ETF’s (Exchange Traded Funds), and the top 3 funds for this index are,

  1. Vanguard Total World Stock ETF  (USD 16 Billion AUM)
  2. Blackrock/Ishares ACWI  (USD 8.7 Billion AUM)
  3. Blackrock/Ishares MSCI  (USD 872 million AUM)

And the nature of an ETF/Index fund is this. Whatever stocks that get added to the index tracked by the fund, the fund provider will need to purchase it according to its weightage allocated, regardless of the price. And when one gets removed, it needs to sell it all, regardless of the price as well.

Now, the total AUM of just the top 3 is USD25.572 billion or approximately RM99.733 billion.

The weight-age given to each company is usually 0.1% to 2%. Now, assuming a 0.1% weight-age was given to Nestle. That is a minimum RM100 million additional demand for a company that has 93% of its stock held by 60 people.

Considering how incredibly thinly trader Nestle is, with the vast majority of its shareholders being investors instead of traders (good luck trading this stock, even KYY will struggle), the supply for it was definitely lacking.

I  doubt that most of the investors even knew the stock price movements of the company unless it was announced loudly in the newspapers.

Now, you might say that RM100 million is still just a very small sum. It is true. But never forget, the price of the market is largely set by irrational few. Just like how the world changes to the whims of the intolerant minority.

Of course, one must never forget about the people who like buying something the higher the price goes! And with Nestle being a 100% margin-able stock, as well as a perceived safe buy, I have no doubt many leveraged up to do so, which makes today’s 11% drop almost expected.

I failed to predict this rise, despite knowing the information above and thus missed a potential trading buy the moment it was announced. Oh well, we live we learn.

By the way, big difference between World Index and KLSE Index, the second, has basically zero funds tracking, so no difference.

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