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The move to remove Russian equities from their indices by MSCI and FTSE Russell is likely to have no flow benefit for India and other emerging markets, according to a report by Edelweiss Securities.
MSCI on Wednesday announced that MSCI Russia Indexes will be reclassified from Emerging Markets to Standalone Markets status. The reclassification decision will be implemented in one step across all MSCI Indexes, including standard, custom and derived indexes, at a price that is effectively zero and as of the close of March 9, 2022, it said in an official announcement.
FTSE Russell has also announced that Russia will be deleted from all FTSE Russell Equity Indices, effective from the open on Monday, March 7, 2022. Russia index constituents that are listed on the MOEX will be deleted at a zero value, it said.
Remove Russian equities
“MSCI Inc and FTSE Russell have announced that they will be removing uninvestable Russian equities at zero value from all the global and regional indices. Thus no flow benefit to India or other EM countries,” Abhilash Pagaria-Head, Edelweiss Alternative Research said.
“MSCI will now call Russia a standalone market. 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,” added Pagaria.
Ongoing restrictions
Foreign institutional investors are not allowed to trade Russian equities as per ongoing restrictions, thus index constituents will be deleted at a “zero value”.
“For instance, in MSCI Emerging Markets Index, Russian equities weighed somewhere around 2 per cent and now the passive trackers will value the holding at zero in the books which effectively means despite weight reduction of Russian indices there won’t be any flow benefit in other countries of the EM Index,” Edelweiss Securities said in its report.
As per the report, after 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 (~15-20 bps) thus, there will be no benefit in terms of flows. The top 4 heavyweights in MSCI EM Index are China, Taiwan, India (current weight is somewhere near to 12.29 per cent) and Korea,” it said.
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