MSCI, FTSE mull removal of Russia from indices; India among 4 emerging markets likely to benefit; what should investors do?

Due to escalating tensions between Russia and Ukraine, many countries have imposed sanctions on Russia and Global index providers MSCI and FTSE are considering to take Russian stocks out of the index.       

Meanwhile, as per Zee Business TV report, MSCI will apply “special treatment” to Russian securities, while FTSE is expected to provide update on this development on Friday.     

In view of the latest development, Edelweiss Alternative Research believes that India would be one of the emerging markets to benefit the most in case Russia is removed from MSCI or it faces weight reduction. Beside India, China, Taiwan and Korea are also likely to benefit.   

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As per Edelweiss, China, Taiwan, India together holds approximately 12.29% weight in the MSCI.      

"If we assume that current weight of Russia in MSCI Emerging markets which is approximately 2.3% is reduced to zero, then four countries gaining the most will be China, Taiwan, India (current wt. is ~12.29%) and Korea.  If Russian stocks are removed then, India could be getting appx 25bps of inflow which equates to total inflow of about USD 600mn considering current emerging markets' market-caps," says Abhilash Pagaria, Head- Edelweiss Alternative Research.      

The research, however, underlines that it would be difficult for Index providers to remove Russian stocks as media reports claim that Russia’s central bank has ordered brokers not to execute sell orders from foreign shareholders.    

"With such a restriction, even index provider can’t make participant’s exit the Russian constituents and passive traders will have to continue to hold the stocks," it says.    

What should investors do?     

Pagaria is of the view that, until more clarity emerges, it is vague to take any short-term bets on diversion of flows from Russia to other emerging countries as until players sell Russian stocks, they can’t divert the flow.    

It further says that if foreign clients are restricted from selling Russian securities, and in turn they start writing off their investments in the country as oil giant BP and Shell have done, and also in case of any redemption pressures in ETFs, it could lead to trimming of positions in existing holdings and this could result in some selling pressure across Emerging Markets.     

Stocks to benefit   

In case Russia is thrown out of the index, the total inflow of about $600mn would mainly get distributed in index heavy weights like Reliance Industries Limited RIL, Infosys, HDFC Ltd, ICICI Bank and TCS.   

Background   

The development assumes significance as Reuters, which quoted a top executive at equity index provider MSCI, on Monday had said Russia's stock market is 'uninvestable after stringent new Western sanctions and central bank restrictions on trading, making a removal of Russian listings from indexes a "natural next step".     

 "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, MSCI's head of index research and chair of the Index Policy Committee, told Reuters.