Shirley Kemp
Recent changes to Morgan Stanley Capital International’s (MSCI) Standard All Country World Index (ACWI) have resulted in the formation of a new “provisional” ACWI Index. Fifty percent of the new index will be phased in during November, with the rest to be implemented in May. The implications for emerging markets are negative on the whole, with their total share of the index falling from 5% to 3,1%.
The increased weighting of developed markets is chiefly due to the higher average free float, greater number of large, liquid stocks and less restrictive limits on foreign ownership compared to the securities found in emerging markets. The decline in weighting of emerging markets means the total amount of funds allocated to emerging markets is likely to contract.
South Africa is expected to benefit from an increased weighting in the MSCI Emerging Markets Free Index, from 11% to 15,3%. While South Africa should therefore benefit from an inflow of emerging market funds, it will suffer the consequences of a decreasing share of the ACWI Index. South Africa’s previous total weighting of 0,55% in the ACWI will decline to 0,47% in the provisional Index.
Largest gainers in the ACWI will be the United States and the United Kingdom which will increase their weightings to 55,3% and 10,4% respectively. The countries with the largest declines in overall weightings will be Japan (-1,3%), France (-1,2%) and Germany (-1%).
From an individual company perspective, 42 South African companies are now included in the MSCI SA Index, compared to the previous 45. Those companies removed from the index are expected to experience a withdrawal of international investors’ funds as they realign their portfolios with the new weightings. Hardest hit will likely be Absa and Remgro.
The inclusion of Standard Bank for the first time should result in increased demand for its shares while the demand for Absa simultaneously declines leading to a potential relative underperformance from the share.
Similarly, Remgro’s large offshore shareholder base (10% to 15%) will be looking to rid themselves of their stakes in the company, which will have a significant negative impact on the company’s market value. Its indirect representation in both the MSCI UK and South African Indices through British American Tobacco and First Rand respectively may, how-ever, offset the price pressure to some extent.
Of the new additions Anglo American will doubtless benefit most.
In: Anglo American; Old Mutual; Datatec; Standard Bank; Alex Forbes
Out: Absa; De Beers; Pepkor; Primedia N; Remgro; Reunert; Wooltru ordinary shares