MSCI Rejig: What it Means and How it Will Impact Flows

MSCI

For global passive investors like index funds and ETFs, the MSCI index has long been a benchmark for allocation. Hence, any changes in the index composition results in buying or selling of stocks depending on whether their weights in the index increase or reduce. 

The MSCI (Morgan Stanley Capital International) does a semi quarterly review every August. In the latest review done on 11th August, there has been no additions or deletions of stocks in the Indian indices. However, there is still likely to be a reduction in weight. Here is why.

In the emerging markets (EM) index, India and China are key participants. Even if there is no change in the India portfolio, a sharp increase in the China allocation would automatically reduce the India allocation on a relative basis.

In the August 2021 quarterly China review by MSCI, there have been 18 additions and 7 deletions to the MSCI, China-A Onshore Index. In addition, there are 23 additions and 2 deletions to the MSCI China All-Shares index. The net result is that the weight of China in the MSCI EM index will go up and that of India will reduce.

 

 

It is estimated that this shift will result in $160 million (Rs.1,200 crore) worth of selling in major Indian stocks. For instance, blue chips with a high weightage like RIL, Infosys and HDFC will be among the stock to see heavy selling. 

However, there are stocks like Tata Steel and Havells which will see inflows as a result of this MSCI rejig. All changes will be effective from the close of 31st August, so all the flows will happen well before that. For traders, it could be a short term trading opportunity for sure.
 

Watch: What is MSCI India Index

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