GCC markets likely to attract $1 billion as Russia is removed from MSCI index

The exclusion of Russia from MSCI’s Emerging Market Index is expected to attract additional passive flows to the tune of $1 billion to GCC markets.

A report by the Kuwait-based asset manager Kamco Invest said: “GCC countries reported weight of 5.73% in the MSCI EM Standard index as of December-2021. We expect the weight to increase to 5.96% after the index reconstitution. The increase in weight by 0.23% is expected to attract additional passive flows to the tune of $1 billion, based on passive funds tracking the index of around $425 billion.”

“In addition, with over 3x active funds, the actual flows to the GCC markets could easily exceed $3- 3.5 billion, in our view,” the Kamco Invest report added.

There are around $1.8 trillion of active and passive assets tracking the MSCI Emerging Market index globally. Out of this around $425 billion are estimated to be passive funds tracking the index, the Kamco Invest report noted.

This would imply that flows to other constituents of the index is expected to increase in the coming weeks as Russia is removed from the index. However, unlike the previous reconstitutions by the MSCI, the inability to sell Russian equities by the fund managers could make the process of reallocation much more gradual as compared to a much shorter window for passive funds, the report said.

Reclassification Done Last Month

The MSCI and FTSE announced last month that the index compilers had reclassified Russia from their Emerging Markets status to Standalone markets status. MSCI has reduced the weight of Russia to zero on 9 March 2022. Russia had a weight of around 3.8% in MSCI’s Emerging Market Standard Index in December 2021.

However, the events at the start of 2022 had already lowered the weight of Russia to around 2.2%, according to reports. With MSCI removing Russia from its indexes, the weight of the rest of the EM countries is expected to increase, Kamco Invest noted.

On 28 February 2022, MSCI launched a consultation with international institutional investors on the accessibility and investability of the Russian equity market. During the consultation, MSCI received feedback from a large number of global market participants, including asset owners, asset managers, broker dealers, and exchanges with an overwhelming majority confirming that the Russian equity market was currently uninvestable and that Russian securities should be removed from the MSCI Emerging Markets Indexes.

Material Deterioration

Consultation participants highlighted several recent negative developments that led to a material deterioration in the accessibility of the Russian equity market to international institutional investors, to such an extent that it does not meet the Market Accessibility requirements for Emerging Markets classification as per the MSCI Market Classification Framework.

To assist investors in their planning for the implementation of the reclassification decision, MSCI already calculated more than 100 global and regional indexes that exclude Russia.

For example, MSCI Emerging Markets ex Russia, MSCI ACWI ex Russia, MSCI EM EMEA ex Russia, MSCI EM Eastern Europe ex Russia, etc.

A rise in Brazil and a smaller decrease in China, of 7.3 percent, “partially offsets the overall impact of a 41.3 percent decline in Russian equities” on the EM index, Kamco said.