A war has never done any good to anyone. However, there could be an opportunity in disguise for the Indian equity markets as the tensions between Russia and Ukraine heats up.
While we write this, our heart goes out to those who’ve been living through this crisis and have lost their loved ones.
A top executive at Morgan Stanley Capital International (MSCI) says a removal of Russian listings from (MSCI) indexes is a “natural next step” as Russia’s stock market is “un-investable” after stringent new western sanctions and central bank curbs on trading.
“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
Melas is MSCI’s head of index research and chair of the Index Policy Committee.
Are you wondering if this will help the Indian equity markets?
“If MSCI finalizes to remove Russian stocks from EM (Emerging Markets) Index and at the same time FIIs are not restricted to sell the constituents then it could lead to 25 bps increase of India in MSCI Emerging Markets. The inflow in India as per current EM market cap could be $600 million, which will mainly get distributed in index heavyweights like Reliance Industries, Infosys, HDFC, ICICI Bank, and Tata Consultancy Services”.Abhilash Pagaria, Head of Edelweiss Alternative Research
In our opinion this step seems highly likely. The invasion of Ukraine has caused mass departure of companies from Russia. The country’s largest foreign investor, BP Plc. announced on Sunday that it would exit its 20% stake in state-run Rosneft. This move resulted in a $25 billion write-off in value.
Norway’s biggest energy Company Equinor ASA announced withdrawing from its JVs worth $1.2 billion in Russia. Moreover, global financial institutions are either winding down or suspending business in Russia, due to heavy sanctions by western countries.
Removing Russian securities from the MSCI’s EM index will be a significant event. MSCI is an investment research organization that provides Hedge Funds and institutional investors with stock indices, portfolio risk, performance analytics, and governance tools. The organization is well-known for its benchmark indexes, such as MSCI Emerging Market Index and MSCI Frontier Markets Index. It has been introducing indexes since 1969 and has published over 1,60,000 indexes focusing on different geographies, stock types etc.
This means, whether it a demography or stock, the large equity investors rely on MSCIs intelligence to make their next investment move.
So, if MSCI says Russia has become an “un-investable” market, you must pay attention to this development.
Impact of removing Russian stocks on Indian stock exchange
Coming back to Edelweiss’ analysis, if the MSCI excludes Russian securities from the EM Index it could benefit the Indian markets.
Russia currently has 2.3% weightage in the MSCI’s EM index. Edelweiss expects it to drop to zero post removal. After that China, Taiwan, India, and Korea will benefit the most from this development.
While we hope the Indian equities get the possible inflows worth $600 mn at the earliest, participants cannot exit these Russian stocks due to restrictions and passive investors may have to hold-on to their investments longer. If MSCI removes the Russian stocks and investors get a chance to exit, then diverting funds to other emerging markets may be possible.
However, we don’t know when this will happen. We urge you to pay attention, stop, evaluate, and then decide on your investment strategy.
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