Morgan Stanley expects India’s weight in the MSCI Emerging Market index to fall 20 basis points by August, when the full impact of the inclusion of China's A-Share index kicks in.
This is based on the assumption that weight of China A shares post inclusion will be increased to 5 percent in two tranches by August, the brokerage said in a report. The impact on India is premised on "all things being equal"; that is, no further changes in weights of any countries in the index.
A 20-basis point drop in weight could potentially lead to outflows of around $540 million from Indian markets as passive funds adjust their portfolios, said Morgan Stanley. Global passive funds tend to mirror the MSCI indices and often make adjustments to their portfolios when the index composition changes.
Stock Specific Changes
In its report, Morgan Stanley also picks stocks which it believes have potential to be included in the MSCI India index.
Power Grid and Pidilite Industries are "high conviction” stocks that can make it to the index, said the Morgan Stanley report. The rationale for including these stocks is that they have sizable market capitalisation.
Stocks like Avenue Supermarts, Future Retail, HDFC Standard Life Insurance and Interglobe Aviation could also be likely contenders for inclusion in the index, said Morgan Stanley. The level of conviction on the inclusion of these stocks is lower due to their lower free float market capitalisation.
Morgan Stanley believes that Tata Motors DVR and Vakrangee Ltd stand a chance of being excluded from the index. The drop in the free float market capitalisation of both stocks could be the rationale for their exclusion.
Ultratech Cements and Container Corp are likely to see potential inflows of $40–50 million due to increased weightage in the index. The foreign investment limit for Utratech was raised to 40 percent from 30 percent in March. Foreign investors have a headroom to buy about 24 percent in Container Corp.
In November, MSCI had announced that the telecom services sector will be broadened and renamed as ‘communication services’ to include companies that facilitate communication and offer related content and information through various media.
Following that, media stocks like Zee Entertainment would be reclassified into the MSCI India communications sector rather than being bucketed with the consumer discretionary sector. Telecom stocks like Bharti Airtel and Bharti Infratel will also be a part of this sectoral classification.
MSCI will announce changes to its Indices on May 15. The changes will be effective starting June 1, 2018.
(Corrects an earlier version that misstated the timeline for changes to MSCI Emerging Market Index)