Each quarter the S&P/ASX 200 (INDEXASX: XJO) is rebalanced to reflect companies with the largest-weighted market capitalisations. This rebalance ensures that the broader market remains liquid and tradeable. Companies added to the benchmark ASX 200 index can experience an increase in demand as fund managers and institutions balance and hedge their portfolios.
The Q3 FY20 rebalance of the ASX indices was abandoned due to the extreme volatility caused by the coronavirus pandemic. As a result, the June rebalance of the index has attracted more interest and activity.
Here are 2 new additions to the ASX 200 index that you should keep your eye on.
Megaport Limited (ASX: MP1)
With businesses relying on the internet to work remotely, shares in the IT sector showed incredible resilience during the coronavirus pandemic. Megaport has been one of the company’s that has thrived during the lockdown period.
The company is a global leader in interconnection services. It uses software-defined networking (SDN) centres to provide bandwidth, allowing customers to connect their network to other services. This allows users to quickly build and access connections to various services. It also offers users scalable solutions with flexible terms, allowing businesses to scale up or down as required.
Megaport’s services are essential which was reflected in the company’s share price recovery. Megaport’s share price soared 120% from its March low to its June high. This gave the company a market capitalisation of more than $2 billion and a place in the ASX 200 index.
With many companies considering the potential of having remote workers post-pandemic, Megaport’s services could receive increased attention.
Mesoblast Limited (ASX: MSB)
Mesoblast’s share price nearly tripled in the 3 months to 30 June with news of the company’s potential coronavirus treatment. This propelled the biotechnology company into the ASX 200 index.
Mesoblast is a world leader in developing regenerative medicines for inflammatory diseases. It prides itself on innovation surrounding stem cell research. The company made headlines in April after it announced promising results for its Remestemcel-L treatment for COVID-19.
In a US trial, the company recorded an 83% survival rate in ventilator-dependent COVID-19 patients. Furthermore, 75% of patients had successfully come off ventilator support within 10 days. Due to the urgent nature of COVID-19 therapies, Mesoblast’s treatments undertook a $46 million phase 2/3 trial in order to gain approval from the US Food and Drug Administration.
Mesoblast also completed a $138 million capital raising in order to scale-up manufacturing of its products and is also in the process of conducting clinical trials in Australia. Mesoblast’s treatments, if approved, will likely generate significant interest from fund managers.
Should you buy these additions?
The addition of a company to the ASX 200 can lead to increased demand in their share registry as many funds have a mandate that requires them to have exposure to companies on a certain index.
In my opinion, the most prudent strategy would be to keep these new additions to the index on a watchlist and let price action dictate before making an investment decision.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of MEGAPORT FPO. The Motley Fool Australia has recommended MEGAPORT FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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