Indian stocks are expected to receive about $1.5 billion foreign institutional investors (FII) money due to the increase of India’s weightage in the MSCI Standard Index
The unsettling winter of the West seems to be a no botheration for equity markets in India as a clutch of stocks is waiting for a pot of hot foreign money with changes in composition of one key index and benchmarking of a US pension fund. The enthusiasm is understandable and market investors are already frolicking. The valuation of all companies listed on the BSE hit $4 trillion for the first time ever while the 50-share index Nifty hit the 20,000-mark once again.
So, what’s the euphoria about? Indian stocks are expected to receive about $1.5 billion foreign institutional investors (FII) money due to the increase of India’s weightage in the MSCI Standard Index (Emerging Market Index). Another, $3.8 billion is likely to hit Indian stocks as the US Federal Retirement Thrift Investment Board is switching to a new MSCI index (which includes India) as its benchmark, for its International Stock Index Investment Fund (I Fund).
First about the changes in MSCI. As part of the index provider’s review and rebalancing quarterly review, MSCI will include fresh nine India stocks with no exclusion in the MSCI Global Standard index (Emerging Market index), which will potentially increase India’s weightage in the index. While the index changes were announced on November 14, they will be implemented for the market cap indexes by November 30.
“Post-rebalance, India's stock count will rise to 131, and India’s weights are set to move close to 16.3 percent compared to the current 15.9 percent. India's representation in the EM index will reach an all-time high, marking a significant increase over the past three years, almost doubling its weight,” says Abhilash Pagaria, head, Nuvama Alternative & Quantitative Research.
The nine inclusions in the MSCI index are IndusInd Bank estimated to fetch $355 million, Suzlon Energy ($289 million) Persistent Systems ($255 million), Apollo Tubes ($228 million), Polycab India ($189 million), Tata Motors ($184 million), Macrotech Developers ($167 million), One97 Communication ($162 million) and Tata Communications ($159 million).
MSCI Global Standard index is tracked by passive index funds worldwide and any change in the composition typically impacts flow in stocks. Size segment migrations are generally triggered by changes in the full company market capitalisation of a company relative to the required size threshold.
Now about the change in benchmark of the US pension fund. The Thrift Savings Plan’s (TSP) International Stock Index Investment Fund (I Fund) in the US will make changes to the index it is benchmarked. From 2024, the fund is transiting to the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index (also called MSCI ACWI IMI ex USA ex China ex Hong Kong Index). Currently, the I Fund is tied to the MSCI Europe, Australasia and Far East (EAFE) Index.
The change to the benchmark index was based on the recommendations of Aon, its investment consultant after the Federal Retirement Thrift Investment Board (FRTIB) conducted a routine review of their four benchmark indexes. “By broadening the index, the Board is expanding investment opportunities and improving the I Fund’s risk-return profile, in line with its statutory mandate and fiduciary duty to the 6.9 million TSP participants,” it said in a statement.
The MSCI ACWI IMI ex USA ex China ex Hong Kong Index provides exposure to 5,621 large-, mid-, and small-cap stocks in 21 developed markets and 23 emerging markets, representing 90 percent of non-US market capitalisation. This adjustment to the I Fund will more than double the number of countries included in the fund and will change the number of equities by 700 percent. The board noted that the MSCI ACWI IMI ex USA ex China ex Hong Kong Index is expected to outperform the MSCI EAFE Index on a risk-adjusted basis over the long term.
“Historical analysis confirmed that the risk-adjusted returns for the MSCI ACWI IMI ex USA ex China ex Hong Kong Index have exceeded those of the MSCI EAFE Index over the past 20 years,” it said.
According to Aon, overall, operational complexity has increased when investing in emerging markets in recent years given a range of events such as investment restrictions on sensitive Chinese technology sectors, delisting of Chinese companies and sanctions on Russian securities due to the Russia-Ukraine conflict. These types of unforeseen events can incur transaction costs and may cause performance and volatility swings which led to the decision to change the benchmark index.
Japan holds the highest representation at 17 percent in the MSCI All Country World (ACWI) ex USA ex China ex Hong Kong Investable Market Index, while India is on the seventh spot with a weight of 5.3 percent and 567 companies making the cut to this index.
“The potential flow in 2024 could range from $3.7-$3.8 billion. While it's a positive step for India in attracting more stable FII flow, the impact may not be a significant needle mover for stocks or market at large. As the flow will be distributed across 563 stocks in proportion to their free float,” Pagaria explains.
According to his estimates, Reliance Industries, ICICI Bank, Infosys, HDFC Bank and TCS will benefit the most in terms of flows.
Indian markets have been on the rise after a few tumultuous months while FIIs are also returning to equities. In November, FIIs have invested around $640 million worth of stocks. This follows massive selling by FIIs in the previous two months where they dumped nearly $2.66 billion in October and around $2.19 billion in September.