If one were to go by the recent report of the UBS Group, BRICS — the acronym that became synonymous with fast-growing economies in the last two decades among the global investment fraternity — may come under heavy pressure due to massive outflow of funds.

The rejig of portfolio by major index providers will likely to result in some $121 billion in active and passive fund flows shifting across the emerging market universe, a Bloomberg report quoting UBS said.

Investors should prepare for unprecedented opportunities in emerging markets over the next year as new entrants including Saudi Arabia and China’s domestic shares are added to global indices, in what UBS Group AG calls relatively ‘seismic shifts’.

Global index providers such as London Stock Exchange Group Plc unit FTSE Russell, MSCI Inc and S&P Dow Jones Indices are due to review a series of indices to take on board the so-called SACKs — Saudi Arabia, Argentina, China onshore shares (also called A-shares) and Kuwait.

Investors will look to position themselves, align their portfolios and take account of relatively seismic shifts in emerging market index weights, said the UBS report and added “With over $500 billion of passive fund flows alone tracking the EM segment across MSCI, FTSE and S&P, we expect liquidity shifts to occur.” By May 2020, when the last of the current spate of index reviews is set to take place, $37 billion in passive fund flows would have been ploughed into SACKs assets, UBS estimated. Active fund managers, in all probability, will be forced to participate, at the very least, to maintain current tracking error levels to the tune of about $84 billion in incremental active flows over time, UBS predicted.

Among the losers, the biggest active and passive outflows, in aggregate, may be seen among Hong Kong and American Depository Receipts of Chinese stocks ($34.5 billion), South Korea ($15.7 billion) and Taiwan ($12.8 billion) with India, Brazil, South Africa and Russia also likely impacted, according to UBS.

Emkay study

A similar study done by Emkay Global Financial Services has pointed out a potential outflow of around $1 billion from MSCI India index. Constituent stocks of the MSCI Market Index may get impacted, with the proposed changes to computing calculation methodology for foreign ownership limits, as mentioned in a consultation paper released, said Emkay. The outcome of the consultation will be announced on March 29 and if the proposals are accepted, they will be implemented from May.

Once the changes are accepted, this will reduce India’s weight in the MSCI Emerging Market index by 0.23 percentage points to 8.55 per cent, it calculated. Stocks such as L&T and ITC would be impacted the most, according to Emkay Global.

Adding fuel to fire

Besides, inflows into domestic equity funds have been witnessing a slowdown lately. Mutual fund houses in January saw the lowest monthly gross inflows since April 2017, but net inflows increased month-on-month due to a fall in redemptions. The equity asset value of top 20 mutual funds dropped 1.6 per cent month-on-month to ₹8.3 lakh crore in January.

With elections around the corner, reports of an exodus from the Indian bourses could worry local investors in the short term at least.

As most of the stocks are already at yearly lows, some even at multi-year lows, retail investors are eagerly waiting for positive news flows to change the current tight situation.

Related Topics