The Morgan Stanley Capital International Index or MSCI Index was the BIG reason for cheer in the markets yesterday, despite the dismal global markets. Any rejig of the MSCI Index always has the potential to swing the market moods completely.

MSCI said that it will be implementing changes in the foreign ownership limits in the MSCI Global Indexes, which will contain Indian securities. It will implement the changes at the close of 30 November, effective 1 December. The list of ‘additions’ and ‘exclusions’ will be announced on 11^th Nov.

This is indeed good news as the interpretation of this rejig – billions of dollars are expected to flow into domestic stocks.

Morgan Stanley Research put out a report stating that it expects MSCI India to see passive inflows of $2.5 billion on this. And then it added that Kotak Mahindra Bank, PI Industries and IPCA Lab will enter the MSCI Global Index – this was enough and naturally, these three stocks were major gainers.

That’s not all – the report said:

• Asian Paints likely to see biggest inflow of $209 million
• Bajaj Finance of $207 million
• L&T of 139 million
• Britannia Industries of $123 million
• Nestle India of $120 million
• Tech Mahindra, NTPC, Divi’s Labs, Cipla, Titan, Maruti Suzuki and Tata Steel may also see inflows of upwards of $77 million.
• Weightages of consumer discretionary, consumer staples, healthcare, industrials, materials and utilities will increase by 0.3-0.8%.
• High potential stocks to enter the MSCI Index - Apollo Hospitals and L&T Infotech
• Medium to high potential stocks to enter the MSCI Index - LIC Housing Finance, REC and Shriram Transport Co
• Medium potential stocks to enter the MSCI Index - Muthoot Finance.

The one vexing question which all punters have – how does MSCI select these stocks? Well, most certainly not at random. The index is based on the MSCI Global Investable Indexes (GIMI) Methodology—a comprehensive and consistent approach to index construction that allows for meaningful global views and cross regional comparisons across all market capitalization size, sector and style segments and combinations. The main aim while choosing the stocks is index liquidity, investability and replicability. The index is reviewed quarterly—in February, May, August and November—with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting undue index turnover. During the May and November semi-annual index reviews, the index is rebalanced and the large and mid capitalization cutoff points are recalculated.

It does not mean that from 1st June onwards, the stocks added will zoom and those deleted will always remain in the red. But what it does indicate is that a rebalancing will come in - other funds will also follow suit and say, in two-three weeks, the new index will get balanced. So, in coming weeks, for short term, these stocks could see some added volumes and volatile prices.

Just as exclusion of a stock from the MSCI does not mean that the company’s fundamentals have gone phut; addition also sometimes might be purely from a technical perspective. So do not go purely by what MSCI adds or deletes as your cues to buy and sell respectively. Use it only as information but act only on fundamentals and future prospects of the company. Use the MSCI Index to see which industries the FIIs are backing actively and which have the least weightage – now that is good information to make your choice of stocks based on fundamentals.