Taiwan, Korea exit may help India

Market participants await MSCI decision to reclassify these two as developed nations today

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Indian equities are in dire need of good news. And, given that little seems to be happening either on policy or reforms, market participants are desperately hoping MSCI’s Annual Market Classification Review tomorrow will result in Taiwan and/or Korea being reclassified as developed markets. If this happens, the weightage of other emerging markets like India and China would increase in the MSCI Emerging Market Index.

The reclassification would increase India’s share in the monies allocated to emerging markets, as there will be fewer countries in the emerging markets index. However, the increase in India’s weightage would be much lower than China’s and Brazil’s. According to estimates of Morgan Stanley's estimates, a potential reclassification of either countries or both in the developed market could result in $875 million to $2.5 billion of passive flows for India.

In the report, Morgan Stanley has worked out different scenarios of either or both countries are moved to the developed market index. In case only Korea is reclassified as a developed market, then India's weightage will increase to 7.59 per cent from the current 6.41 per cent. On the other hand, if only Taiwan is reclassified, India's weightage will increase to 7.20 per cent. In case both countries are reclassified, India weight will increase substantially to 8.73 per cent.
 

BLESSING IN DISGUISE
Market	Old weight (%)	New weight (%)	Inflow $billion
SCENARIO 1  If only Korea is reclassified
MSCI India	6.41	7.59	1.29
SCENARIO 2  If only Taiwan is reclassified
MSCI India	6.41	7.2	0.88
SCENARIO 3 If both Taiwan and Korea are reclassified
MSCI India	6.41	8.73	2.50
Market data as of close on June 11 Source: Morgan Stanley Quantitative and Derivatives Strategies

In case, either of these scenarios play out tomorrow, then it would be nothing short of a lottery for India, said Mehraboon Irani, principal and head of (PCG) at Nirmal Bang. “Given the current macro-economic situation, nobody would have anticipated that more money could flow into India, therefore, it would be a bonanza. However, this proposal has been under review for many years now,” he added.

Even last year, both countries were under review as they meet most of criteria, they were not reclassified as developed markets. Korea and Taiwan meet most of the developed markets criteria within the MSCI framework, especially those pertaining to economic development, market size and liquidity.

However, not all criteria on market accessibility are met by both countries. MSCI has highlighted the lack of full currency convertibility, including the absence of active offshore currency markets and the rigidity of the foreign investors ID systems as the two main reasons for keeping the two countries in the EM category, explains Morgan Stanley's report.

However, recent developments have increased the possibility of Korea being moved to the developed market index. The report says: “In Korea, anti-competitive practices relating to the provision of stock market data were also identified as an issue, although this may no longer be applicable following the recent data provision agreement between Korea Exchange (KRX) and MSCI in October 2011. These criteria will continue to be an area of focus in this year’s Annual Market Classification Review.” Evidently, any move to reclassify these two countries would be a bonanza for India.