India misses free ride from MSCI upgrade

A default increase in India’s weightage following changes in Morgan Stanley Capital International’s (MSCI) Emerging Market Index did not, well, happen.

MSCI chose to postpone the reshuffle in its indices and poof! went nearly three billion dollars of expectations.

South Korea and Taiwan would not be reclassified as developed markets, at least until 2012, according to a press release from MSCI.

South Korea and Taiwan are both heavyweights in the index, accounting for 14.4% and 11.7%, respectively, weightage. If any of them were to move out of the index, the weightage of India was expected to go up from the current 7.3%. This could have resulted in $2.7 billion additional inflows, experts said.

MSCI carries out an annual review every June.

“Accessibility issues in Korea and Taiwan, in particular the lack of full currency convertibility, including the absence of active offshore currency markets ... remain unchanged from the view of institutional investors,” said a note from MSCI.

Global funds allocate money based on a country’s weightage in the MSCI indices. An increase in weightage to India was expected to result in proportionate flows from passively managed funds which track the index lending support to markets.

“It was largely expected that Korea would be upgraded which would have lead to a 100-200 basis points hike in India’s weightage. The flows would now continue to depend on relative valuations of India with respect to other markets,” said N Sethuram, chief investment officer of Daiwa Mutual Funds.

Experts, however, said the likely weightage increase for India would have led to just incremental flows in the short term and that fundamentals continue to play far more important role in institutional investor’s decision to invest money in India.

“The weightage in the MSCI index is a reference or benchmark for certain set of investors, while allocating money into India. The long-term investors base their decision on fundamentals of the economy and corporate earnings. Currently India is not that attractivene in the short term, from a trading perspective, because of headwinds and uncertainty in corporate activity, but from a long-term view, India would continue to attract flows,” said Naresh Kothari, president at Edelweiss Capital.

FIIs have net-sold equities worth Rs2,145.60 crore so far in this calendar year against inflows of Rs133,266 crore in 2010.
The reclassification of Qatar and United Arab Emirates from frontier markets to emerging markets has also been postponed till a review in December 2011.