Bottom line
On May 13, MSCI announced the results of the May 2019 Semi-Annual Index Review for the Global Equity Indices. All changes will be implemented as of the close of May 28, 2019, rather than June 3, as originally scheduled. As expected there were no inclusions and exclusions expected this time around, but in May 2020 the Index’ structure may undergo dramatic changes. We estimated over $400 mln in outflows of passive money from Russia due to inclusion of new countries into MSCI EM and downgrade of weight of some Russian issuers in the index due to contraction in free float as a result of previous corporate actions such as buyback, which, in turn, had an impact on certain shares and Russian market in general.
Global changes to MSCI EM
May 2019 Semi-Annual Index Review has led to some significant global changes: 8 Argentinian and 32 Saudi Arabian securities were added to MSCI EM at an aggregate weight of 0.3% and 2.6% respectively. Thirty Saudi Arabian securities will be added at half of their FIF-adjusted market capitalization, representing an aggregate weight of 1.42%. The second and final step of the inclusion will coincide with the August 2019 Quarterly Index Review. MSCI reclassified the MSCI Argentina Indexes from Frontier Markets to Emerging Markets in one step coinciding with Maty Index Review. Saudi Arabia inclusion will bring up to $40 bln in inflows from active investors this year, Argentina inclusion — $6–8 bln.
Twenty-six China A shares will be added to the MSCI EM at an aggregate weight 1.76%, a rise of 0.96%. All inclusions will bring up to $2.8 bln in inflows from passive investors.
Inclusions of new countries and instruments will result both in inflows and outflows from many countries. Total outflow mostly from Asia ($1.1 bln) and Russia will amount to $1.8 bln, according to our assessments. Russia’s weight is expected to drop by 0.2%, or $224 mln. Lower free-float of certain issuers that have launched buy-backs in 2018, such as Lukoil and MTS, or changes in ownership structure (Polyus Gold and Tatneft) will result in an outflow of additional $205 mln from Russia.
Our calculations are based on the assessment of passive capital in MSCI EM estimated at $112 bln. The figure reflects the funds under the management of Index ETFs linked to MSCI EM that surpasses the Index’ cap.
Passive capital flows in MSCI EM, $ mln
Source: MSCI Inc, ITI Capital
MSCI EM composition, %
Source: MSCI Inc, ITI Capital
Free-float changes — MSCI Russia
Source: MSCI Inc, ITI Capital
Lukoil
- From September 2018 to April 2019, Lukoil bought back 30.8 mln of ordinary shares totalling 4.1% of the issuer's free-float (750 mln). Given that the current free-float factor for MSCI is 65%, we expected it to drop to 60% (MSCI rounds up to the closest 5), resulting in lower weight (18.4%, −1.3%) and outflow in $65 mln, just above average daily trading volume (ADTV). However according to MSCI official calculations, the free-float factor was lowered to 55% which implies that almost 70 mln shares were bought back, according to MSCI, leading to a drop in weight by 3,4%, or $175 mln in outflows, which was the reason for a recent sell-off
Tatneft
- At the end of 2018, Svyazinvestneftekhim, owned by the government of Tatarstan, purchased 1.2% of Tatneft's ordinary shares, bringing its share in the company to 34.6%. The move reduces MSCI free-float factor to 65%, down from 70%
- This is expected to lead to a drop in of the company’s weight from 8.7%, to 8.2%, and an outflow in $35 mln of passive capital, which is almost three times above ADTV
Polyus
- In April 2019, major shareholder of Polyus Said Kerimov (a son of senator Suleiman Kerimov) sold 3.5% of the company's shares on LSE and MICEX. The sale will bring the free-float above 20% (25% under MSCI standards) and trigger an inflow in $15 of passive capital as a result of the weight’s growth to 1.3%. The inflow will exceed ADTV by over 2.5 times
MTS
- In July 2018, MTS has launched a $30 bln buy-back programme effective for two years. As of today, MTS bought over 5% of shares, that is expected to lead to a drop in the free-float factor from the current 45% to 40%. However, this will not materially change neither the company’s weight, nor the outflow of passive capital
MSCI Russia: May Review brings no surprises — major changes seen in May 2020
- On May 13, MSCI announced the results of the 2019 Semi-Annual Index Review for Global Equity Indices, including MSCI Russia Standard Index, triggering major market movements on May 14. Since Saudi Arabia and Argentina were added to the Index, all changes will be implemented as of the close of May 28, 2019, rather than June 3, as originally scheduled
- There are 23 constituents in the Index now, 58% are from the O&G industry. On November 13, 2018 MSCI excluded HYDR from MSCI Russia. This is the most recent exclusion following Semi-Annual Index Review. The most recent inclusion (Polymetal) took place in November
- Calculations that MSCI relies on when adding and excluding companies from the index were made in April 20 — April 30. During this period, the MOEX Russia Index little changed. Minimum market capitalization requirement for the MSCI is $ 3,200 mln, as it has been in recent years, and the free float-adjusted market capitalization is $ 1,600 mln
Candidates for de-listing in November 2019
- Transneft pref has the lowest weight in the index (0.59%), it was 0.61% at the beginning of the year. Transneft is the most likely candidate for de-listing, it survived the six-month review in November 2018 and is likely to do it again in May 2019. Free-float capitalization is the company’s weakest point. It stands at $1,202 mln, just $130 mln above the minimum requirement (11%). Transneft exclusion may trigger an outflow in $30–35 mln, that is 10 times as large as the ADTV in USD
Candidates for inclusion in May 2020
- In May, three companies will be added to the index, one will be excluded (25 in total, 27 was the maximum). Inclusion of Yandex (possibly in 2020 February quarterly review) will be the key driver of volatility in the MSCI Russia Standard Index. Other companies (FGC and RusHydro) may be included too, but they have to significantly increase free-float capitalization. This is likely to happen by November 2020, rather than by May 2020
1. Yandex (YNDX RX) may be the strongest candidate for inclusion, but the company has low local liquidity. Yandex free-float adjusted cap is $11 642 mln, seven times as large the minimum cap requirement (FF-adjusted MSCI cap). Total market capitalization at the time of calculations was $12,127 mln, which is 3.8 times as more than the MSCI Russia minimum market cap requirement. The minimum local liquidity level of 12-month ATVR now stands at 13.5%, which is 1.5-2% lower than the minimum requirement of 15%. According to the 3-month ATVR, ATVR was way below 15% until Q42018. Since Q42018 this indicator has increased significantly and, therefore, if it does not drop to that level by the end of the year, there are chances that the company will be included in the index during quarterly review in February 2020.
According to MSCI, liquidity is measured on the last trading day of December for a quarterly Index review in February. Hence, Yandex should keep high liquidity till the year’s end. If the company is added to MSCI Russia, its weight will be about 4.5%, the inflow of passive capital may exceed $220 mln and almost $1 bln from active, which with respect to passive flow is 30 times above the current 30-day ADTV on the MICEX and 2-3 times above the current 30-day ADTV on the NYSE.
Yandex — quarterly liquidity ratio of ATVR MSCI
Source: MSCI Inc, ITI Capital
2. Rostelecom (RTKM RX) is the second most promising candidate for inclusion. It meets minimum market capitalization requirement (>$342 mln) but does not meet the free-float adjusted market cap (
