Amid deepening Russia-Ukraine tensions, MSCI and FTSE Russell on Wednesday said they would remove univestable Russian equities at zero value from all the global and regional indices – meaning, there will be no inflow benefit to India or other countries in the emerging market indices. Earlier, analysts expected the indices rebalancing to result in $600 million inflows into India alone, as a result of Russia’s removal.
With the ongoing restrictions, FIIs are not allowed to trade Russian equities, thus index constituents will be deleted at a “zero value”. FTSE Russell said the decision will be effective from 7 March, while MSCI said its decision will be implemented in one step across all MSCI indexes as of the close on 9 March.
In the latest announcement, MSCI noted that feedback from global market participants showed an overwhelming majority confirming that the Russian equity market is currently uninvestable. “Consultation participants highlighted several recent negative developments that led to a material deterioration in the accessibility of the Russian equity market to international institutional investors, to such an extent that it does not meet the Market Accessibility requirements for Emerging Markets classification as per the MSCI Market Classification Framework,” the index provider said.
MSCI Russia Indexes reclassified from emerging markets to standalone markets status
Russia is now what MSCI calls a “Standalone Market”. “MSCI will continue to monitor market developments and may issue additional guidance or announce further changes relevant to specific indexes, if necessary” the index provider said in a release. MSCI also said that it is reclassifying MSCI Russia Indexes from emerging markets to standalone markets status.
No flow benefit for Indian equities
In MSCI Emerging Markets Index, Russian equities weighted somewhere around 2 per cent, and now the passive trackers will value the holding at zero in the books which effectively means despite of weight reduction of Russian indices, there won’t be any flow benefit in other countries of the EM Index, said Edelweiss in a note.
“Post the adjustments, Russia’s weight should get redistributed among all the countries in the indices. The possible weight increase for India will be very minuscule (~15-20bps) thus, there will be no benefit in terms of flows,” it said. Note that the top 4 heavyweights in MSCI EM Index are China, Taiwan, India (current wt. is somewhere near to 12.29%) and Korea.
“MSCI Standalone Market Indexes are not included in any of the widely followed passive indices like the MSCI Emerging Markets Index or the MSCI Frontier Markets Index, missing out on foreign passive flows. Currently, other countries in the Standalone category are Botswana, Lebanon, Palestine, Panama and Zimbabwe,” said Abhilash Pagaria- Head, Edelweiss Alternative Research.
