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Markets may take the MSCI EM rejig in their stride, say analysts

Puneet Wadhwa/New Delhi 15 May 19 | 11:56 AM

Markets are likely to take the MSCI Emerging Market (EM) index rejig, which involves increasing the weight of China A shares, in their stride if corporate results remain healthy and the outcome of the ongoing general elections does not spring a surprise, say analysts.

According to a release by MSCI, as the first step, 26 China A shares (18 of which are ChiNext – a NASDAQ-style board of the Shenzhen Stock Exchange – stocks) will be added to the MSCI China Index and the inclusion factor for 238 existing constituents will be increased from 0.05 to 0.10. China A shares will have an aggregate weight of 5.25 per cent and 1.76 per cent in the MSCI China and MSCI Emerging Markets Indexes, respectively.

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"The FIF-adjusted market capitalisation of China A shares will be further increased to 0.15 as part of the August 2019 Quarterly Index Review and then to 0.20, together with the inclusion of Mid Cap China A shares, in the final step as part of the November 2019 Semi-Annual Index Review," said a note from MSCI.

That apart, 30 Saudi Arabian securities will be added at half of their FIF-adjusted market capitalisation, representing an aggregate weight of 1.42 per cent in the MSCI Emerging Markets Index.

Reports peg the outflow from Indian shores at around $700 million as a result of the MSCI Emerging Market index rejig.

However, analysts believe that the markets could take the rejig and the ensuing outflow in their stride if corporate results back home remain healthy and the ongoing general election outcome does not spring a surprise. These two events, they believe, could see domestic fund managers and abroad take a fresh investment call as regards India.

"MSCI rejig will impact exchange traded fund (ETF) flow, which is passive money. The other fund managers across the globe may still hold on to their positions if they feel that the underlying assets still hold promise. Elections and corporate results now hold key for fund flows into India. That said, between March and April 2019, we got flow to the tune of around $6 billion. Therefore, the projected outflow of $700 million is far less on a relative basis," said U R Bhat, managing director at Dalton Capital Advisors.

A recent Kotak Institutional Equities report tracking fund flows and assets under management (AUM) for India-dedicated funds in March 2019 at $47,869 million. Of this, ETF constituted $10,777 million, while the non-ETF segment stood at 37,092 million.

Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, too, believes that the outflow, if any, could be temporary and the markets now await clarity on outcome of the general elections for further direction.

“For me, the bigger event lies ahead of the MSCI rejig, that is the outcome of the ongoing general election that will set the tone for the overall market direction for the next few months. The MSCI rejig is a temporary phase that the markets need to cope with. Investors should not worry and should not read much into this," he advises.

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