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5 things to know before the MSCI index review
As an investor, you are probably on the lookout for market indices to help you in your investment decisions. An index is a collection of a select group of stocks that help in the measurement of stock market performance. (Know more about stock indices here)
The Morgan Stanley Capital International (MSCI) indices are such indices that can be quite useful in this regard. On May 15th, 2018, you’ll hear news about MSCI Indices rebalancing. This may have some implications for your investments.
Here’s all you need to know to understand the MSCI index review:
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What is the MSCI index:
There are many MSCI indices, which act as indicators of stock market performance in a particular area. Each MSCI index is specific to a particular geographic location. There are many indices such as the MSCI India index, the MSCI Emerging Market Index, and so on. And like any other index, the MSCI indices track the performance of the various stocks included in the index. You can find more information on the MSCI India index and its use by FIIs here.
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Why are indices reviewed regularly:
The stock market changes continuously. Companies increase and decrease in size; new companies get listed on the stock market while others get de-listed. As a result, it is not possible for an index’s characteristics to remain constant for a long period of time. So, every now and then, the index gets reviewed and necessary adjustments are made to the list of stocks. This is to ensure that the index keeps track of the evolution in the market in a fair and transparent way.
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What are the changes expected:
During its semi-annual review on May 14th, 2018, MSCI Inc plans to announce the changes to all its indices, including the MSCI Emerging Market Index. One major change expected is the inclusion of China’s A-shares in the index. This means that if you are a passive investor who tracks the emerging markets using the MSCI Emerging Markets index, you would be exposed to China’s stock markets from next month. China’s A-shares are those stocks that are quoted in the Renminbi currency. These shares are traded on the Shenzhen and Shanghai stock exchanges.
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How does MSCI rebalancing affect India:
Currently, India’s weightage in the MSCI Emerging Markets Index is 8.5%. The inclusion of China’s A-shares implies that by August, India’s weight in the Emerging Market index could fall by 0.2% (or 20 basis points). The changes in the MSCI Emerging Market index will be effective starting from June 1st, 2018. This could result in the outflow of as much as $540 million by passive funds, according to a report by The Economic Times.This is because whenever an index changes its composition, passive investors tracking that index around the world make similar adjustments to their portfolio. With the MSCI Emerging Market index composition changing, experts believe that passive investors could follow. (Read about passive investing here)
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Impact on Indian stocks:
Regarding the MSCI India Index, Morgan Stanley believes that companies such as Power Grid and Pidilite Industries have the potential to be included in the index. This could be because of their sizable market capitalisation, according to a report by Bloomberg Quint. As a result, it is expected that Power Grid and Pidilite Industries could receive inflows of $121 million and $97 million respectively. Other stocks with high potential for inclusion include Avenue Supermarts, Future Retail, HDFC Standard Life insurance and Interglobe Aviation. On the other hand, Tata Motors DVR and Vakrangee could be excluded from the index, reports suggest. This could be due to a drop in the free float market capitalisation of these stocks—the number of shares of a company that is in the hands of public investors barring the promoters.
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$3 billion
This is the amount of money that Foreign Institutional Investors (FIIs) withdrew from India between April 30th and May 4th, 2018, as per a report by Moneycontrol. An increase in risk in emerging markets has been the reason for this outflow. These outflows could increase once the constituents of the MSCI EM index changes, the report by Bloomberg Quint suggested.
