India’s weight on MSCI EM Index to increase by 55 bps

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Published: April 8, 2020 3:54:38 AM

In its note, analysts at Morgan Stanley mentioned that stocks such as Larsen & Toubro, Asian Paints, Bajaj Finance, Nestle and Divi’s Laboratories are expected to be top beneficiaries of the change as they could witness an increase in their stock weightage.

The change in foreign limits, according to Morgan Stanley, would create room for inclusion of stocks in the index.

India’s weight on the MSCI Emerging Markets (EM) Index could increase by 55 basis points as a result of rebalancing and change in foreign investment limits. According to Morgan Stanley’s report, this change could attract $1.3 billion worth passive flows in the Indian market.

“We expect MSCI to rebalance MSCI India weights to reflect this change along with removing the DR (depository receipts) in the FOL calculation,” said Morgan Stanley in its note. Analysts in the note also mentioned that MSCI India weightage in EM is likely to rise by 55 basis points and its foreign inclusion factor would increase from 0.39 to 0.42. Currently, MSCI India’s weightage in the MSCI EM index stands at 7.6%, which would increase to 8.1%, the analyst note shows.

In its note, analysts at Morgan Stanley mentioned that stocks such as Larsen & Toubro, Asian Paints, Bajaj Finance, Nestle and Divi’s Laboratories are expected to be top beneficiaries of the change as they could witness an increase in their stock weightage. 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. The investment bank expects less than a third constituents to see an increase in stock weights whenever MSCI would consider rebalancing.

The change in foreign limits, according to Morgan Stanley, would create room for inclusion of stocks in the index. The top contenders for inclusion would be Kotak Mahindra Bank, Biocon, Indraprastha Gas, Torrent Pharmaceuticals, Abbott India as well as Procter & Gamble Hygiene. “We estimate the index weights for ITC and Bajaj Auto to be lowered by 0.4% and 0.15%, respectively, from the current levels of 2.1% and 0.6%,” said Morgan Stanley. Public sector companies such as NTPC, Power Grid Corporation and Hindustan Petroleum, among others, are also expected to benefit from this change.

On April 1 this year, India entered into a new regime on foreign limits where it increased the foreign portfolio investment (FPI) limits to sector foreign limits. On March 31, MSCI said that it would wait for the practical implementation of these changes and systematic publication of the new sectoral limits applicable to Indian sectoral limits applicable to Indian securities before making any changes to Indian indices. Following this announcement, last week, Indian depositories NSDL and CDSL revised FPI limits for domestic stocks listed on the exchanges.

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