Billions of dollars may flow into equity markets post MSCI review; these stock could benefit most

With MSCI (Morgan Stanley Capital Investment) yesterday announcing that it will implement the change in foreign ownership limit (FOL) for Indian securities during the November semi-annual index review, the hunt now begins to correctly predict the amount of inflows the change will result in and to circle out stocks that stand to benefit. While Sheela Rathi and Ridham Desai of Morgan Stanley estimate $2.5 billion in passive inflows, Chandan Taparia, VP – Derivatives & Technical Research, Motilal Oswal expects to see $4 billion inflows. The massive inflows that are expected come in are also likely to keep domestic equity markets on a high in the coming sessions.

Morgan Stanley expects MSCI India’s weight in MSCI EM index to increase to 8.7%, aided by the weight increases for current constituents. With new additions taken into consideration the weightage could be up at 8.8% from the current level of 8.1%. Currently the MSCI India free float market capitalization stands at $539,365 with a free float factor of 40%. With the change in FOL, Morgan Stanley expects the market-capitalization to increase to $581,764 with a free float factor of 43.2%. 

MSCI is likely to announce the results of its semi-annual index review on the morning of November 11. Kotak Mahindra Bank, Pi Industries, and IPCA Laboratories could be fresh inclusions into MSCI indices in the November rejig with implied passive flows of over $700 million, according to Morgan Stanley. Meanwhile, Chandan Taparia of Motilal Oswal is expecting Kotak Mahindra Bank, MRF, Ashok Leyland, and ACC to be included into the MSCI indices post the FOL change. The inclusion of these four could result in $1.01 billion fund inflows. 

Among scrips that are already included in MSCI indices, Morgan Stanley expects Asian Paints to attract inflows of $209 million, Bajaj Finance to witness $207 million flows, and Larsen & Toubro to see inflows of $139 million, as some of the biggest beneficiaries from the 39 stocks that could see an increase in weightage. Taparia’s estimates see Bajaj Finance, L&T, Asian Paints, Britannia, and Nestle India as some of the already listed stocks that stand to benefit. He expects inflows to the tune of $779 million in inflows for such equities. 

The November review will also see natural changes in MSCI indices, caused by change in full market capitalization. Muthoot Finance, Apollo Hospitals, L&T Infotech, SBI Cards, and Cadila Healthcare could be considered as a part of the natural inclusions during the November review. Sectorally, Morgan Stanley’s estimates see a positive impact in sectors such as consumer discretionary, consumer staples, health care, industrials, materials, and utilities. Energy and Information Technology could be biggest losers with a drop in weightage.