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Russia’s Dismissal From MSCI Gauge Favors Brazil the Most

Russia’s Dismissal From MSCI Gauge Favors Brazil the Most

Brazil is coming out ahead after Russia was torn from one of the world’s most widely followed emerging-market equity gauges.

The largest Latin American economy was the biggest winner of the exclusion of Russian securities from the MSCI Emerging Markets Index in response to President Vladimir Putin’s invasion of Ukraine. Brazilian stocks accounted for 5.93% of the benchmark as April began, a 1.3 percentage-point increase from the end of January, according to MSCI Inc. data.

That’s another boost for the nation’s shares, which are already the world’s best performers in dollar terms this year, with the benchmark Ibovespa index up more than 30%. With over $16 trillion in assets benchmarked to MSCI’s products overall, the rebalancing can have monumental importance for the flow of money. Some of the world’s biggest developing-market exchange-traded funds -- including BlackRock Inc.’s IEMG and EEM -- are linked to the firm’s indexes.

Russia’s Dismissal From MSCI Gauge Favors Brazil the Most

Russia’s “exclusion from the equity indexes gives more exposure to other net commodity exporters in Latin America,” said Leonardo Pellandini, a strategist at Bank Julius Baer based in Zurich. “Investors find a better way to be exposed to higher commodity prices also being insulated, at least geographically, from the geopolitical risks.” 

Foreigners poured 65.3 billion reais ($13.7 billion) into Brazil’s stock market in the first three months of the year, the most for any quarter since at least 2008, according to B3 local exchange data compiled by Bloomberg. Global investors have been attracted by relatively cheap valuations following years of underperformance and the vast number of Brazilian companies that benefit from higher commodity prices.

Brazilian equities were forecast to receive $1.3 billion in inflows as investors relocated money after the dismissal of Russian shares, according to estimates by Itau BBA. 

Other Latin American nations including Chile, Colombia, Mexico and Peru also saw their shares increase following the exclusion of Russia. As commodity producers, they may also have an edge over other developing-nation peers as long as raw material prices keep on rising.

“The best opportunity from high commodity prices lies in copper exporters Chile and Peru,” said Hasnain Malik, an emerging market equity strategist at Tellimer in Dubai. “They have political risk but that is well understood, they are not that expensive, and in combination are the equivalent of OPEC+ for copper.”

Stocks from South Korea, India, and South Africa, also benefit from the rebalancing, as their weightings increased by more than a half-percentage point since end-January.

Turning bigger

Smaller markets often benefit the most when their weightings are increased in broader gauges because of the additional access to investors. While the standings of Peru, for example, in the MSCI gauge have increased by just under 0.06 percentage point since the end of January, that’s a big increase considering its modest weight of just 0.28%, as of this month, according to MSCI data. 

A 0.1 percentage point increase in the weight of China, meantime, may have an easier-to-overlook impact given shares from the country account for more than 30% of the emerging-market index. 

As of the end of January, before troops crossed over Ukraine’s border, Russia’s shares held a weighting of about 3.2% in MSCI’s emerging gauge, making it the eighth biggest constituent. That number slid down to 1.6% by the end of February, before the securities were removed entirely on March 9.

The MXEF Index has more than doubled the number of nations represented in its ranks to 24 since it was launched in 1988. In that time, it’s dropped a handful of countries beyond Russia from its universe. MSCI reclassified Argentina’s equities last year due to severe capital controls that were meant to stop dollars from exiting the country. It also downgraded Pakistan from its emerging-market index in 2008

The dismissal of Russian stocks from all of MSCI’s gauges came along with similar moves from the likes of FTSE Russell, as well as bond benchmarks like JPMorgan Chase & Co.  

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