In a notable shift, MSCI ( Morgan Stanley (NYSE:MS) Capital International) is set to remove a significant number of Chinese stocks from its indexes, reflecting the increasingly challenging economic prospects for China.
Simultaneously, India is making strides in closing the gap with China on the MSCI Global Standard Index with the announcement of seven stocks to its India gauge, and an increase in the weight of HDFC Bank in what signals a shift in the economic landscape of emerging markets.
MSCI’s equity indexes are tracked by institutional investors worldwide for asset allocation and investment analysis.
China’s decline in MSCI indexes
MSCI Inc. has announced it will remove 60 stocks from the MSCI China Index this month. This follows the removal of 56 stocks in May and 66 in February, marking the highest tally of deletions in at least two years.
As of the end of July, China represented 22.33% of the Emerging Markets gauge.
The changes, effective after the close on August 30, will also apply to the MSCI All Country World Index. Among the stocks slated for removal are Air China Ltd., Sany Heavy Equipment International Holding Co., and Shanghai Fosun Pharmaceutical Group.
The deletions underscore the increasingly grim prospects for the world’s second-largest economy, as Chinese shares risk losing their outsized presence in emerging market portfolios to peers such as India and Taiwan.
In a Bloomberg report, Marvin Chen, a strategist with Bloomberg Intelligence in Hong Kong, stated,
These deletions will help even the playing field for EM investors. The large weighting and impact of China earlier may be more evenly distributed to other markets such as India, Korea, and Taiwan.
India’s ascendancy in the MSCI Global Standard Index
In contrast to the reduction of China stocks from its indexes, MSCI announced the addition of seven stocks to its India gauge, including Dixon Technologies India Ltd., a supplier to Samsung Electronics (KS:005930) Co.
Meanwhile, Bandhan Bank (NS:BANH) Ltd. will be removed, and the weight of HDFC Bank Ltd . (NS:HDBK) will be gradually increased.
Rail Vikas Nigam (NS:RAIV) Limited (RVNL), Dixon Technologies, Vodafone Idea (NS:VODA), Oil India (NS:OILI), Zydus Lifesciences (NS:ZYDU), Prestige Estate Project and Oracle Financial Services Software (NS:ORCL) (OFSS) are the seven stocks that will be included in the MSCI Global Standard Index in the next few weeks, said a release from MSCI.
The move will increase the global visibility of the stocks and attract foreign investors to them.
The share price of Dixon and Oil India rose by 3% and 2.72% respectively.
The MSCI announced that it will maintain HDFC Bank in its indices, and bump up the ‘Foreign Inclusion Factor’ for the stock from 0.37 to 0.56 which means 56% of its shares will be available for foreign investment in the index.
The weightage of the bank in the Global Standard Index will be raised in two tranches.
HDFC Bank stands to gain significantly, with the increased weight likely to attract $1.8 billion in inflows in the near term and another $1.8 billion by November, according to Abhilash Pagaria, head of alternative and quantitative analysis at Nuvama Wealth Management Ltd.
India’s increasing weight likely to bring inflows of up to $3 billion
India’s weight on the MSCI Global Standard Index, which tracks emerging market stocks, has risen to a record high.
The country’s weight is expected to rise from 19.2% to 19.8%, while China’s weight will fall from 24.8% to 24.2%. This shift is likely to attract inflows of about $3 billion into India’s equity markets, according to Nuvama.
The changes in the index weights will come into effect after markets close on August 30.
“Given the current pace and momentum in domestic equities, India could potentially cross 22% weightage by year-end,” said Pagaria.
Analysts and fund managers broadly agree that India’s increasing presence in the MSCI Emerging Markets (EM) Index enhances the gauge’s appeal to global investors who have been cautious due to China’s dominance.
This change is expected to make India a more favourable standalone investment destination, especially with the rising equity market, increased free float for companies, and new large listings narrowing the gap in weightings by year-end.
Global funds however are expected to remain cautious on the broader market and will most likely play selective stocks on Asia’s fifth largest market, given the high valuations the scrips trade on, market watchers said.
Other companies that will see an increase in their weightage on the index include Bharti Airtel (NS:BRTI), Coal India (NS:COAL), and Mphasis (NS:MBFL). Meanwhile, Maruti Suzuki (NS:MRTI) India, LTIMindtree (NS:LTIM), Ambuja Cements (NS:ABUJ), Adani Enterprises (NS:ADEL), Yes Bank (NS:YESB), and SRF (NS:SRFL) will see a reduction.
This article first appeared on Invezz.com
