Changes price performance based; see inflows into EMs: MSCI

Equity index provider MSCI announced addition and deletion of stocks as part of its November semiannual index review. It will take effect from November 26. Scrips like Nestle India, Tech Mahindra and Yes Bank were added, while Bank of India, Canara Bank, Unitech, and Wockhardt were dropped. Raman Aylur Subramanian, its executive director- Index Research says that the changes are based on price performances of stocks. The criteria also involve liquidity and meeting size cut-off criteria, Subramanian explains. 

MSCI has reclassified equities across emerging, developed and frontier markets On inflows into emerging markets (EMs), Subramanian sees an increased trend of funds moving to India. “Overall, investors are slowly moving into more emerging market and they don’t get impacted by what is happening on the short-term basis”, he tells CNBC-TV18. Also read: Current situation worse than that in 2008: Marc Faber Below is the edited transcript of his interview to CNBC-TV18. Q: Could you tell us roughly what will be the inflows into the stocks getting added into the MSCI? What will be the outflows from Canara Bank, Bank of India, which are going to be deleted from the MSCI standard index? A: In MSCI global indices, we do semi-annual rebalancings, which happen in May and November of each year. We do look at each of the countries and do a synchronized rebalancing. The amount in terms of bps changes the new stocks are not substantial; we are talking about four-five bps for Yes Bank and a way bit higher for Nestle in sync for the deletions. The deletions are happening because of price performance. In terms of inflows and outflows, it depends upon how much of money is tracking these benchmarks. We are talking roughly about USD 7.5 trillion benchmark to MSCI indices. We expect some amount of flows coming in and going out depending upon whether this stock has been added or deleted. Q: What is the criteria for the addition and deletions in the MSCI smallcap index? We have seen a couple of these stocks like Just Dial, like Torrent Power that have had a phenomenal run in the last many days and now these stocks have been added to this index. A: What we do is that it is a rules based index. We don’t have any stock selection committee sitting. They are purely based upon two main criteria, investibility i.e. the stock should be liquid, investable, and has sufficient free float. If the stock meets the criteria, the next rule that is to look at the size cut-off for the various size segment indices that they have. So, when you look at emerging market, we are looking at companies substantially when you look at the standard indices. We are talking about companies which are more than USD 2-2.5 billion and above and when you look at smallcap, it is likely below that. At that point, these companies have good price performance and they also have improved their investibility requirements that made them enter our MSCI indices. Q: The MSCI India has outperformed the Asia ex-Japan in the last one month. Have you seen large inflows into India? A: In terms of the way our global investors, the MSCI clients, they have a long-term view on different markets including emerging markets. The money that comes in is mostly coming out of this latest point of view, but a long-term global investor is increasing overall allocation to all the EMs including India. When you look at the weight of EMs within a global index like the all country world index which includes both developed and EM, it is roughly about beating 10-12 percent. On an average when you look at all the global investors, they are typically larger home buyers. At EM, probably they are putting maybe 5-6 percent today and remove the home buyers, then that is one of the trend that we are seeing probably. They have to come and catch up and after 10-12 percent on a passive way. It is a long-term trend. We will see that maybe on the short-term you will see some market impact depending upon the news. Overall, investors are slowly moving into more emerging market and they don’t get impacted by what is happening on the short-term basis.