The current weight of Russia in MSCI Emerging markets index is around 2.3 per cent, and it is expected to be reduced to zero post exclusion. After this, China, Taiwan, India and Korea will benefit the most, said Edelweiss.
Amid the ongoing Russia-Ukraine conflict, if MSCI removes Russian stocks from EM Index, it may lead to $600 million in foreign fund inflows into Indian equities, said brokerage firm Edelweiss on Tuesday. If Russian stocks are removed from the Index, and at the same time FIIs are not restricted to sell the constituents, it could lead to 25 bps increase of India in MSCI Emerging Markets, it added. “The inflow in India as per current EM market-cap could be USD 600mn which will mainly get distributed in index heavy weights like RIL, Infosys, HDFC, ICICI Bank and TCS,” said Abhilash Pagaria, Head, Edelweiss Alternative Research.
Earlier this week, MSCI said that Russian securities could be removed from its indices. “Russia’s stock market is “uninvestable” after stringent new Western sanctions and central bank restrictions on trading, making a removal of Russian listings from indexes a “natural next step”. It would not make a lot of sense for us to continue to include Russian securities if our clients and investors cannot transact in the market,” Dimitris Melas, MSCI’s head of index research and chair of the Index Policy Committee, told Reuters.
The current weight of Russia in MSCI Emerging markets index is around 2.3 per cent, and it is expected to be reduced to zero post exclusion. After this, China, Taiwan, India (current weightage is 12.29 per cent) and Korea will benefit the most, according to Edelweiss.
Top 10 stocks to benefit the most in India from Russian stocks removal from MSCI
“If Russian stocks are removed, then India could be getting approximately 25bps of inflow which equates to total inflow of about $600 million, considering current EMs market-caps. The flow will get divided among all the Index members and the top 10 names which will benefit the most in India are Reliance Industries (RIL), Infosys, HDFC, ICICI bank, TCS, Bajaj Finance, Hindustan Unilever, Axis Bank, Bharti Airtel and Larsen and Toubro (L&T). Nevertheless, the stock level impact won’t be much as all the top names are highly liquid,” the brokerage further said.
Meanwhile, Russia’s central bank has ordered brokers not to execute sell orders from foreign shareholders. In order to oppose Russia’s military operations in Ukraine, several Western countries have imposed large-scale restrictions and sanctions on Russia. Due to this, many financial institutions around the world have started winding down or suspending business in Russia. Recently, oil and gas major Shell announced its intentions to exit all its Russian operations. The decision came a day after rival British Petroleum (BP) abandoned its stake in Russian oil giant Rosneft.
Vague to take any short-term bets on diversion of flows from Russia
Edelweiss in its note said, “Now with such a restriction, even index providers can’t make participant’s exit the Russian constituents and passive traders will have to continue to hold the stocks. Thus, until more clarity emerges, it is vague to take any short-term bets on diversion of flows from Russia to other emerging countries as until players sell Russian stock they can’t divert the flow.”
“If foreign clients are restricted from selling Russian securities, and, in turn, they start writing off their investments in the country just like oil giant BP and Shell have done, and also in case of any redemption pressures in ETFs, it could lead to trimming of positions in existing holdings and this could result in some selling pressure across Emerging Markets,” the brokerage added.
