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MSCI: Does it matter?

May 21, 2001

You must have been reading about the MSCI recast in the leading financial papers over the last few days. Did you wonder, what MSCI really means and what it signifies? Basically, MSCI is a weightage given to specific countries by Morgan Stanley, which serves as a benchmark for a cross border portfolio mainly created by foreign institutional investors. The foreign funds may not have active coverage of all countries of the world and thus rely on the MSCI for their investment exposure to countries.

India has been one of the largest losers among the emerging markets in the MSCI recast. India's weight in the MSCI EMFI (emerging market free index) has reduced from 6.9% to 3.9%. The new index has 59 companies, down from the earlier 71. While 17 companies have been knocked off the list, 5 new companies have been added. These are Reliance Petroleum, VSNL, HDFC Bank, Dabur and Britannia. The weight of the IT sector has increased significantly, while the consumer products sector is the biggest loser.

MSCI Sector weightages
Sector Provisional
weightage (%)
Existing
weightage (%)
IT & Telecom 28.4 21.4
Energy 8.7 5.1
Financial 10.2 9.8
Health Care 7.8 7.5
Utilities 1.6 1.7
Consumer Products 23.6 29.3
Industrials 4.6 5.9
Materials 15.1 19.5

The companies that have been knocked of the list include Apollo Tyres, Aptech, Century Textiles, DSQ Software, Essel Packaging, Escorts, Finolex Cables, Jaiprakash Industries, Kochi Refineries, Reckitt Benckiser India, Siemens, Sterlite Industries, Tata Chemicals and Videocon International.

Top 5 gainers
  New weightage
(%)
Previous
weightage (%)
Reliance Petro 5.6 0.0
VSNL 2.6 0.0
Infosys 10.6 8.3
Wipro 5.4 3.6
HDFC Bank 1.3 0.0

As the MSCI recast is largely in line with expectations, the immediate reaction on the bourses may not be significant. Also, because of the extended period of implementation foreign investors have nearly a year to re-balance their exposure. It is not clear how much of the foreign investments on the bourses are benchmarked to the MSCI. However, India being a small part of the emerging markets it is likely that the MSCI serves as atleast an entry-level indicator to the foreign funds.

Top 5 losers
  New weightage
(%)
Previous
weightage (%)
HLL 10.8 14.5
Reliance Industries 9.5 12.5
SBI 2.5 4.0
ITC 5.0 6.1
BPCL 1.1 2.0

The encouraging factor for the bourses is that the FIIs, despite knowing that a recast was in the pipeline have been net buyers. However, the FIIs have been buying the old economy counters, whereas in the MSCI recast the technology sector has been the key gainer.

The effect the MSCI has on stocks is apparent from the fact that five companies, which were added to the list viz. Reliance Petro, VSNL, HDFC Bank, Dabur and Britannia, are among the key gainers on the bourses this morning. Similarly, as the consumer products sector lost in the overall sector weightage, HLL was among the key losers in the morning’s trade.

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