Tesla’s Important Day – Global Markets

After months of speculation, the world’s most important car company, Tesla

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(NYSE: TSLA) Finally joins the S&P 500 with the opening of trading on Monday. The company, with a value of about $ 600 billion, is the largest addition in history to the Snoopy index, which weights the companies on the basis of market value. Since the announcement in November, investors have speculated about the impact of the company’s entry into the index, and how much of the trillions of dollars Snoopy followers will be added to Tesla’s pocket. From mid-November until today, the stock has soared above 60%.

The electric vehicle manufacturer is trading at extraordinary multipliers, 170 times the company’s expected profits in 2021, after jumping about 680% this year. The value of Tesla at the end of tonight’s trading will determine the weighting Tesla will have in the index. The S&P 500 is weighted according to the market value adjusted for the number of shares available for trading. In the case of Tesla, about 80% of the shares are held for trading, with the rest held by associates, including CEO Ayalon Musk.

Tesla’s current market capitalization is about $ 640 billion, meaning about $ 510 billion is available for trading. The total market value of the S&P 500 is about $ 32 trillion. And if you add up all these numbers, Tesla is expected to enter the index at a weight of about 1.5% to 1.6%, meaning the company that entered the largest weighted weight ever. The title has so far been held by Berkshire Hathaway, the investment firm of the legendary Warren Buffett, which was added to the index in 2010 with a weighting of about 1.4%.

Adding a giant company like Tesla unbalances the index and makes entry complicated. Snoopy considered adding Tesla in two strokes when the first was expected to be a smaller weighting, and then a full weighting, but opposition from fund managers lowered the proposal off the agenda.

Many investors have concluded that Tesla’s high market capitalization will significantly boost the valuation of the S&P 500, but analysts at Goldman Sachs (NYSE: GS) predict that the company will have far less impact. Many estimated that the profit multiplier of the index, which currently stands at 22, will increase by about 2 points with the entry of Tesla, but Goldman expects that the ratio will increase by only 0.4 points. Although Tesla is about 1.5% of the overall index, its profits are expected to be only about 0.2% of the index. The various ETFs that mimic Snoopy’s performance sometimes weight companies differently, for example the EPS index that weights companies in relation to earnings per share, which may affect the “money flowing in” per share.

Despite this, Tesla will have an impact on the index and the index will affect Tesla. According to Goldman Sachs, if Tesla had entered the index earlier this year, it would have pushed the S&P by another 2%. Tesla’s overall impact is also expected to include a “small mechanical impact on overall volatility” as analysts call it, and on the volatility of the VIX (“fear” index) linked to the S&P 500.

The balance of the S&P 500 over the last quarter, resulted in buying and selling operations totaling $ 32.4 billion, above the average of $ 27 billion, but below the balance in the third quarter of 2018 which stood at a volume of about $ 50.8 billion. The balance tonight after trading is expected to result in an exchange of hands between buyers and sellers for a total of about $ 100 billion. What are these shifts calling for? Because the index changes, and the proportion between companies changes, and all those index erasers need to maintain the appropriate balances. All the more so that companies need to make room for 1.5% of Tesla in the index. There are close to $ 5.3 trillion in funds that mimic the index across its various forms.

Analysts estimate that the major passive funds will trade about $ 6 billion on Tesla to adjust the company to the index. Goldman Sachs predicts that actively managed funds, with reference to the S&P 500, are expected to buy about $ 8 billion of Tesla shares. There are also fears that Tesla will enter an index that is perceived by many as a “risk-free asset”, as Tesla is a volatile stock and many believe it is significantly inflated.

Despite the hype surrounding Tesla, and a 60% jump in value since the announcement of entry into the index on November 16, fund managers will make adjustments to Tesla’s position in the index, as the correlation between Tesla and the market portfolio (the index) stands at 0.39 and reflects a relatively high risk. Past fund managers. As of today, investors continue to be excited about the company entering the index and the stock continues to climb by about 5%, an increase of about $ 30 billion to the company’s value, far beyond what Tesla is expected to receive from the index, but when it comes to Tesla what does it matter?