Biggest Gainers of Rise in India’s Weight on MSCI EM Index

MSCI EM Index To Increase India’s Weight by 0.55%

Introduction

Which large cap stocks are expected to be the biggest gainers of rise in India’s Weight on MSCI EM Index? Indian stocks are expected to see an inflow of more than $7 Billion on account of a likely increase in their weights on the MSCI Index (Emerging Market Index).

Biggest Gainers of Rise in India’s Weight on MSCI EM Index

MSCI Rejig – Morgan Stanley Sees $7 Billion Inflows into India

• From April 1, 2020, India moved into a new regime on foreign limits whereby the foreign investment limit has been increased to the sector threshold. This change is an attempt to fix MSCI India’s low float compared to global markets.
• Following this announcement, on April 2, 2020, Indian depositories NSDL and CDSL revised FPI limits for domestic stocks listed on the exchanges.
• With India swiftly responding to the delay in notifying sector-wise limits for investment in stocks by overseas investors, analysts at Morgan Stanley now expect MSCI to rebalance MSCI India weight in the emerging market (EM) index to reflect this change along with removing the DR (depository receipts) in the foreign ownership limit (FOL) calculation.
• MSCI Inc. is the world’s biggest index compiler with about $12 trillion in assets benchmarked to its products.
• Thus, Morgan Stanley expects MSCI Inc. to rebalance India weights to reflect the change in sector-wise limits for investment in stocks by overseas investors over the next few months.
  1. As a result of rebalancing and change in foreign investment limits, India’s weight on the MSCI Emerging Markets (EM) Index could increase by 0.55% from 7.6% to 8.1%.
  2. Also, India’s Foreign Inclusion Factor (FIF) to expected to rise from 0.39 to 0.42.
• According to Morgan Stanley’s report, the above mentioned MSCI rejig could attract $1.3 Billion worth passive flows in the Indian market.
• Apart from the passive inflow, there could be an active inflow to the tune of $5.7 Billion flows into the Indian equities spread across a bunch of stocks.
• Thus, Indian equities is expected to see the total inflow of almost $7 Billion (Passive Inflow + Active Inflow). In Rupees terms, the total inflow would be almost Rs.50,000 Cr to Rs.55,000 Cr.
• This inflow is expected to erase the current losses in Indian Stock market due heavy FII outflow of almost Rs.65,000 Cr in March 2020 amid Coronavirus outbreak.

Biggest Gainers – Top 5 Beneficiary Stocks of MSCI Rejig

• According to Morgan Stanley, the top five beneficiaries of these regime changes are :
  1. Larsen & Toubro (L&T)
  2. Asian Paints
  3. Bajaj Finance
  4. Nestle India
  5. Divi’s Laboratories
• This is because these stocks could see the highest increase in their weights in the MSCI EM index.

• On a relative basis, large cap stocks such as Reliance Industries, HDFC and Infosys are likely to see the most reduction in weights given the upward rebalancing of beneficiaries.
• MSCI expects less than a third constituents to see an increase in stock weights whenever it would consider rebalancing.
• According to Morgan Stanley, the change in foreign limits would create room for inclusion of stocks in the index.
• The top contenders for inclusion would be :
  1. Kotak Mahindra Bank
  2. Biocon
  3. Indraprastha Gas
  4. Torrent Pharmaceuticals
  5. Abbott India 
  6. Procter & Gamble Hygiene
• According to Morgan Stanley’s estimates the index weights for ITC and Bajaj Auto to be lowered by 0.4% and 0.15% from the current levels of 2.1% and 0.6%.
• Public sector companies such as NTPC, Power Grid Corporation and Hindustan Petroleum, among others, are also expected to benefit from this change.