On March 2, 2022, MSCI Inc., the index sponsor of the MSCI Emerging Markets Index ("MXEF") and other indices, announced that it will reclassify Russian equity indices from emerging markets to standalone status. The change will be effective March 9, 2022.
Will the withdrawal of Russia from global indices assist India
Foreign institutional investors (FIIs) continue to be one of the most significant drivers of the Indian equity market.
MSCI's decision was in response to a consultation requesting feedback from market participants on the appropriate treatment of the Russian equity market within the MSCI indices.
During the consultation, MSCI received feedback from a large number of global market participants, including asset owners, asset managers, broker-dealers and exchanges with an overwhelming majority confirming that the Russian equity market is currently "uninvestable," and that Russian securities should be removed from the MXEF.
S&P Dow Jones Indices ("S&P") made a similar announcement on March 4, 2022, stating that they would remove all stocks listed and/or domiciled in Russia from its standard equity indices at a price of zero, effective March 9, 2022. S&P also will reclassify Russia from an emerging market to standalone status on March 9, 2022.
How important is MSCI Emerging Market Index
The MSCI Emerging Markets Index is a selection of stocks that is designed to track the financial performance of key companies in fast-growing nations. It is one of a number of indexes created by MSCI Inc., formerly Morgan Stanley Capital International.
The MSCI Emerging Markets Index reflects the performance of large-cap and medium-cap companies in 25 nations. All are defined as emerging markets. That is, their economies or some sectors of their economies are seen to be rapidly expanding and engaging aggressively with global markets.
The MSCI Emerging Markets Index currently includes the stocks of companies based in Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.
The index was created in 1988. At that time, companies in only 10 nations were represented. Today, the index is widely used to measure the economic performance of emerging market companies. It is also used by emerging market ETFs and mutual funds as a benchmark against which to measure their own performance
As of December 2021, the MSC Emerging Markets Index recorded a one-year net return of -2.54%, a five-year annualized return of 9.87%, and a 10-year annualized return of 5.49%. Since its inception on Dec. 29, 2000, it has returned an annualized 8.97%.
By contrast, the MSCI World Index returned 21.82% in one year, 15.03% for the five-year period, and 12.70% for the 10-year period. Since Dec. 29, 2000, it has returned an annualized 6.72%.
MSCI Emerging Markets Portfolio Composition
As of August 20, 2020, the top 10 MSCI Emerging Market’s holding companies and their respective weighted average include the following:
Alibaba Group (7.55%)
Tencent Holdings (5.76%)
Taiwan Semiconductor Manufacturing – TSM (5.52%)
Samsung Electronics (3.6%)
Meituan Dianping (1.63%)
Reliance Industries (1.25%)
Naspers Limited (1.18%)
China Construction Bank Corp (1.13%)
Pingan Insurance Group (1%)
com ADR Representing Inc (0.95%)
Can India benefit from Russia Removal
Foreign institutional investors (FIIs) continue to be one of the most significant drivers of the Indian equity market. No denying the fact that FIIs, especially the long-only funds have found India to be one of the most attractive markets since early 2000.
If the MSCI goes ahead and removes Russian listings from the index it could be beneficial for Indian companies, Mumbai-based brokerage firm Edelweiss said in a note to clients.
If we assume that the current weightage of Russia in MSCI Emerging markets which is approximately 2.3 per cent is reduced to zero, then four countries gaining the most will be China, Taiwan, India (current weightage is 12.25 per cent) and Korea.
Meanwhile, China and Taiwan top the list with weightage 29.55% and 15.86%.
If Russian stocks are removed then India could be getting approximately 25 basis points of inflow which equates to a total inflow of about $600 million. Considering current EMs market-caps, Edeleweiss added.
“If MSCI finalises to remove Russian stocks from EM Index and at the same time FIIs are not restricted to sell the constituents then it could lead to 25 bps increase of India in MSCI Emerging Markets.
The inflow in India as per current EM market-cap could be $600 million which will mainly get distributed in index heavy weights like Reliance Industries, Infosys, HDFC, ICICI Bank and Tata Consultancy Services,” said Abhilash Pagaria, head of Edelweiss Alternative Research.
IIFL Institutional Equities said that if these FPI investments are directed towards India, there could be an aggregate inflow of over two billion dollars.
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