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MSCI global equity rebalancing: Erase and Rewind

15 May 2020
MSCI global equity rebalancing: Erase and Rewind

On May 12, MSCI announced the results of the May 2020 Semi-Annual Index Review for the MSCI Equity Indices, all changes will be implemented as of the close of May 29, 2020

On May 12, MSCI announced the results of the May 2020 Semi-Annual Index Review for the MSCI Equity Indices, all changes will be implemented as of the close of May 29, 2020. There will be over 180 deletions worldwide and half of it from the MSCI EM Index, with the bulk accounting for China (45), South Africa (6) , Indonesia (6) and South Korea (5). It could have been worse, but MSCI applied special treatment to the following countries such as Nigeria, Bangladesh, Jordan, Sri Lanka and Palestine.

In DM space, 41 companies from the U.S. were excluded followed by nine in Japan and UK.

Russia saw only one deletion - Transneft preference shares were removed from the index due to a drop in free-float-adjusted capitalization that fell 24% below the minimum threshold.

Exclusion of Transneft pref from MSCI Russia implies $40 mln in outflows of passive money from the pref shares, based on the company’s weight of 0.5% and average daily turnover of $8.5 mln. A passive outflow of $24 mln is expected when the changes come into effect.

According to MSCI, after the deletion Transneft pref will be ineligible for the MSCI Indices as long as the 2014 sanctions remain in place and hence any increases in Number of Shares (NOS) and/or Foreign Inclusion Factor (FIF) will not be implemented.

Passive flow for all constituencies of MSCI only occurs at the time when changes will be implemented, i.e. May 29 2020.

MSCI said there will be 137 additions to the world indices, with the bulk accounting for the SE Asia, including China (56), U.S. (23), Japan (9) India (5) and Canada (5).

Potential candidates for inclusion in MSCI Russia large cap, which were not added to the index in May, but may enter in November are Rostelecom, Tinkoff and Rusal. Tinkoff was automatically added to the MSCI Russia small cap.

Out of three candidates for MSCI Russia large cap inclusion, Rusal and Rostelecom still have more chances. Yandex will be included by default in November with a 6% weight at least.

After the May review changes take effect, MSCI Russia may see a total net inflow of $25 mln of passive funds, $50 mln of active funds at any time, that is a total of $75-80 mln.

MSCI: number of companies included and excluded for each country

MSCI: number of companies included and excluded for each country

Source: MSCI, ITI Capital

Other important corporate changes

Inflow of new funds into Gazprom stocks may amount to $210 mln

  • MSCI Russia has increased Gazprom’s Foreign Inclusion Factor (FIF), the free-float assessment of companies, or the possibility for foreign investors to buy shares, from 45% to 50% after the Moscow Stock Exchange on February 6, 2020 raised the gauge from 45% to 50% after Gazprom sold its quasi-treasury shares for a total of 6.6% of its equity capital in July and November 2019.
  • The company's weight in MSCI Russia will grow from 15.5% to 16.9% from June 1, and the stocks will see $70 mln and $140 mln of passive and active inflows respectively, a total of $210 mln as compared to the average daily turnover of $120 mln.

Inflow of new funds into Polyus stocks may amount to $90 mln

  • Since Polyus sold a 3.84% stake in April 2019 via an accelerated bookbuilding, the company's free-float could advance to 24-25%.
  • MSCI Russia confirmed an increase of FIF from 20% to 25% and of weight in the index from 2.5% to 3.2%.
  • Following the move the stocks will see total inflow of $90 million, of which $30 mln will be passive inflow as compared with the average daily turnover of $35 mln.

Inflow of new funds into Polymetal stocks may amount to $30 mln

  • On July 10, 2019, PPF Group sold about 21 mln shares in Polymetal, which is expected to increase the company's free-float from 45% to 50%.
  • MSCI Russia confirmed an increase of FIF from 45% to 50% and of weight in the index from 2.4% to 2.7%.
  • Following the move the stocks will see total inflow of $30 million, of which $11 mln will be passive inflow as compared with the average daily turnover of $20 mln.

Inflow of new funds into Phosagro stocks may amount to $20 mln

  • Following a partial sale of the company’s stocks by Phosagro’s major shareholder the FIF increased from 30% to 35% and the weight in the index from 0.8% to 1.1%.
  • The stocks will therefore see total inflow of $18 mln, of which $6-7 mln will be passive inflow as compared with the average daily turnover of $3.2 mln.

Outflow from Tatneft stocks may amount to $20 mln

According to MSCI Russia review, Tatneft’s FIF fell from 70% to 65%, bringing the weight down from 6.5% to 5.7%, which implies an outflow of $20 mln, of which $8 mln are passive funds as compared to the average daily turnover of $47.4 mln.

Outflow from MTS stocks may amount to $45 mln

According to MSCI Russia review, MTS’ FIF fell from 50% to 45% due to previous buybacks, bringing the weight down from 2.5% to 2.2%, which implies an outflow of $45 mln, of which $15 mln are passive funds as compared to the average daily turnover of $24 mln.

MSCI Russia: Total inflow/outflow of passive and active funds after May 12, 2020 review

MSCI Russia: Total inflow/outflow of passive and active funds after May 12, 2020 review

Source: ITI Capital, MSCI

MSCI Russia assessment base unchanged

Despite high market volatility, assessment base has not changed, according to our estimates.

 MSCI Russia assessment base unchanged

Source: ITI Capital, MSCI

MSCI Russia constituents

MSCI Russia constituents

Source: ITI Capital, MSCI