Russia not expected to be included as MSCI indices rebalanced

Each quarter, as key stock market indices such as MSCI are rebalanced, markets hoping to be upgraded are on tenterhooks for the announcement of their inclusion. The new review is due tomorrow (February 15).

Russian investors are not expecting the call this time round. A note from Troika Dialog investment bank admitted there is only a slim chance that MSCI Russia’s composition will be changed, with no stocks being added or deleted.

Following last year’s additions of MRSK Holding in November and LSR Group in May, there is now a gap between the stocks fitting MSCI requirements and stocks next on the list that can be added to MSCI Russia. The next two stocks that fit the market cap criteria are Bashneft and PhosAgro, but neither of them have sufficiently large free float to be included.

The bank noted that more investors are switching to tracking the UCITS-compliant MSCI 10-40 Russia Index. The Russian market is fairly concentrated: Gazprom, Sberbank and LUKoil have respective weights in the MSCI Russia Standard Index of 27%, 12% and 11%, making it impossible for UCITS-compliant funds (e.g. European retail fund managers) to track its composition.

They are instead tracking the 10-40 index, which caps the weight of any stock at 10% and the combined weight of the top five stocks at 40%. The index thus caps Gazprom, LUKoil and Sberbank at coefficients that depend on an MSCI algorithm and provide room for speculation as to what will happen with index weights.

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