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Point of View · 06.07.24
MSCI Index Rebalances: India Weighting Up, China Continues Slide
MSCI boosted India’s weighting in the MSCI Emerging Markets Index and reduced China’s in its latest quarterly rebalance, continuing long-term trends.
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MSCI Index Rebalances: India Weighting Up, China Continues Slide
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Key Points
What it is
We analyze the impact of company additions and removals, and other weighting changes, from MSCI’s quarterly rebalance.
Why it matters
Quarterly changes in indexes over time can impact the composition and performance.
Where it's going
India’s stocks outperformed China’s during the rebalance period.
MSCI boosted India’s weighting in the and reduced China’s in its latest quarterly rebalance effective on Friday, May 31, continuing long-term trends. India’s weighting sits at 18% from 8% in 2020 while China has dropped to 27% from a peak of more than 40% in 2020.
Between the MSCI Emerging Markets Index and the , MSCI added 42 companies and removed 121. Along with adds and deletes, the broader rebalance triggers a significant amount of trading activity given an estimated $15.6 trillion in assets benchmarked to MSCI equity indexes as of December 31, 2023.
While implementing rebalances in index strategies, portfolio managers focus on minimizing the cost and to avoid wealth erosion during the rebalance period, in this case from the May 14 MSCI announcement to the May 31 effective date. Additionally, investors in active strategies who use indexes for benchmarks need to reassess their exposure to specific sectors or regions because of changes in index composition.
MSCI Emerging Markets Index
The index measures the performance of large- and mid-cap stocks across 24 emerging markets countries.
MSCI World Index
The index measures the performance of large- and mid-cap stocks across 23 developed-markets countries.
Tracking Error
Tracking error is the difference in performance between a portfolio and its benchmark, often used to determine the degree of active management of an investment strategy.
MSCI World: Offsetting Addition and Deletion
MSCI added 10 companies to and removed 45 companies from the MSCI World Index, representing a somewhat benign 0.61% in turnover. The largest addition was also the largest deletion, which was building materials company CRH, with a weighting of 0.09% (see Exhibit 1). MSCI reclassified it from a U.K. to a U.S. company, which MSCI considers a deletion of a U.K. company offset by the addition of a U.S. company. While this will unlikely impact MSCI World Index managers and their investors, the change sparked trading related to other MSCI indexes. We expected and saw a surge in trading from selling of CRH by managers tracking indexes that exclude the U.S., such as the or , and buying from those tracking the In the U.S., investors traded 60 million CRH shares on May 31, more than 16 times the 30-day average.
MSCI Emerging Markets: 56 Chinese Companies Removed
MSCI added 32 companies to and removed 76 companies from the MSCI Emerging Markets Index, representing a more significant 1.68% in turnover. Of the 76 deletions, 56 of them were in . MSCI removed Chinese companies because they failed to meet higher requirements for market capitalization or the minimum required share (percentage of shares available to the public), among other requirements set by MSCI’s methodology.
MSCI USA Index
The index measures the performance of large- and mid-cap stocks in the U.S.
MSCI EAFE Index
The index measures the performance of large- and mid-cap stocks across 21 developed-market countries around the world, excluding the U.S. and Canada.
MSCI World ex USA Index
The index measures the performance of large- and mid-cap stocks across 22 of 23 developed-market countries, which excludes the U.S.
Float increases or decreases
The float is percentage of total shares available for trading in public markets. A company’s float may increase when long-term strategic shareholders sell shares to the public markets.
EXHIBIT 1: BIGGER CHANGES IN EMERGING MARKETS
The MSCI Emerging Markets Index rebalance adds and deletes created 1.68% of turnover, a more significant weighting change than in the MSCI World Index.
Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of May 14, 2024 in U.S. dollars. MSCI reclassified CRH as a U.S. company from a U.K. company in the MSCI World Index, which MSCI considers a deletion and addition that offset. The float is the amount of shares available to the public, which may change because of transactions by insiders. Share changes may occur as companies issue or repurchase shares. Index holdings are provided for information only and should not be construed as a recommendation of any security. It is not possible to invest directly in any index.
Countries: U.S. and India Rise
In the MSCI World Index, the rebalance caused modest changes to country weights. Notably, the U.S. weighting rose 0.13% and the U.K. dropped 0.10%, largely because of the CRH country reclassification. The next-largest change was Japan, with a 0.06% decrease.
The rebalance caused more significant changes in country composition to the MSCI Emerging Markets Index, reflecting evolving market dynamics and shifting investor preferences. The benchmark's weight to India increased by 0.46% and China’s weight decreased by 0.41%.
EXHIBIT 2: NEAR RECORD HIGH COUNTRY WEIGHTING FOR INDIA
The MSCI Emerging Market Index’s weight to India increased by 0.46%, now near a record high 18% for the country
Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of May 14, 2024 in U.S. dollars.
Sectors: Information Technology Shifts Composition
In the MSCI World Index, sector weightings shifted modestly. Information technology increased 0.15% as artificial-intelligence darlings NVIDIA added 0.05% and MicroStrategy added 0.03%. In the MSCI Emerging Markets Index, the consumer discretionary sector fell 0.17% as Alibaba’s weight declined 0.11% because of a .
Share increase or decrease
Share increases or decreases may occur as companies issue or repurchase shares.
EXHIBIT 3: ARTIFICIAL INTELLIGENCE COMPANIES DRIVE SECTOR CHANGES
Information technology in the MSCI World Index increased 0.15% as artificial-intelligence darlings NVIDIA added 0.05% and MicroStrategy added 0.03%.
Source: MSCI, Bloomberg, Northern Trust Asset Management. Weightings as of May 14, 2024 in U.S. dollars.
Performance Analysis: Adds Outperformed Deletes
As expected, we observed substantial trading during the rebalance period from the May 14 MSCI announcement of the rebalance details to the May 31 effective date of the rebalances. We think stocks of added companies tend to benefit from “buy” pressure as indexers need to add those names to their portfolios while those of deleted companies experience the opposite effect. Intuitively, but not always in reality, this can lead to outperformance as added companies trade the “right way”, in line with expected flows in (buys) and out (sells) of the indexes. We analyzed to what extent performance went the right way for these indexes during the rebalance period.
MSCI World Index
Adds rose 4.1% while deletes lost 5.0%, leading to a positive spread of 9.1%. Notably, U.S. technology company MicroStrategy, the largest corporate holder of bitcoin, rose 16% on May 15, the first day of trading after the rebalancing announcement. However, bitcoin rallied 5.6% on the same day, so it’s unclear to what extent the rebalance caused the surge. On Friday’s effective date, the U.S. listing of CRH rallied nearly 5% from the U.K. close to the U.S. close, while the U.K. listing fell 1.6%, contributing to the outperformance of adds. On the day of the rebalance, however, adds actually underperformed deletes despite CRH, as a couple of technology additions lagged for the day.
MSCI Emerging Markets Index
Similarly, adds outperformed deletes by 9.8% in the MSCI Emerging Markets Index. A meaningful portion of this can be attributed to country effects. Over the rebalance period, MSCI India outperformed MSCI China by 6.7%, reflecting the country bias of MSCI adds in India and deletes in China. On rebalance day, the spread widened considerably with adds outperforming deletes by 4.6%. Although there were some country effects at play, India adds were up 3.5% on May 31 while China deletes were down 2%.
EXHIBIT4: 'RIGHT WAY' PERFORMANCE
Companies added significantly outperformed those deleted from the MSCI World Index and MSCI Emerging Markets Index during the rebalance period from May 14 to May 31. We call this “right way” performance because the “buys” into indexes outpace the “sells” out of the indexes.
Source: MSCI, Bloomberg, Northern Trust Asset Management, from May 14, 2024 to May 31, 2024
What the Rebalance Means to Investors and Index Managers
Index portfolio managers must remain vigilant during these periods to achieve the investment objective of replicating the risk and return metrics of the index and minimize tracking error. Further complicating the management of this rebalance was a change required by the Securities and Exchange Commission. As of May 28, brokers in North America must settle transactions in one business, down from two. This highlights the importance of ensuring proper funding and settlement of trades during the rebalance adjustments. From an index tracking perspective, we believe it is crucial to understand the dynamics that surround an index rebalance — liquidity, risk environment, stock- specific news, and offsetting trade flows — to guide index portfolios through these kinds of events with as little wealth erosion as possible.
Main Point
India Gains Influence in Emerging Markets
China’s weighting in the MSCI Emerging Markets Index has continued to slide to 27% from nearly 40% in 2020, while the weighting of India has surged. With a boost in weighting again in this quarter’s rebalance, India stocks outperformed China’s during the rebalance period.
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