MSCI Russia - May 2020 Rebalancing Review

MSCI has released the results of the May semiannual index rebalancing and annual review of global free float. Russia will see one exclusion (Transneft) and six other weight changes to the main index. The small-cap index will see one addition, TCS. MSCI used a general market cap threshold of $2.9 bln in this rebalancing, slightly below our $3.0 bln lower-boundary estimate. The changes will take effect after global markets close on May 29.> Transneft to be excluded. MSCI remarked that the company's free-float-adjusted market cap had fallen below the minimum required to be maintained in the indexes, in line with our expectations. Due to MSCI's current policy regarding Russian companies under US and/or EU sanctions, the index provider also announced that it would not consider later increases to Transneft's share count or free-float coefficient, and that Transneft would be considered ineligible as long as the sanctions remain in place (or, until MSCI changes policy). As a result of the exclusion, we estimate the stock will see minimum passive outflow of some $29 mln, equivalent to 4.5 times its ADT.> Four float increases, two cuts for Russian companies. Four Russian companies will see increases to their free-float coefficients, causing increases in index weight in the MSCI EM, MSCI Russia and derived indexes. These are Gazprom, PhosAgro, Polymetal and Polyus. Two companies, MTS and Tatneft, will see cuts to their free float and thus decreases in index weight. Tatneft's change was something of a surprise, as the company itself had been disclosing a free float below 65% since before the deadline for last year's annual float review - see our May 2019 preview for an extended discussion. Details of the new weights and minimum passive flow are in the table below. The index provider also negligibly increased Polymetal's share count and raised Polyus's by 0.5%. Despite disclosures of an increased float, MSCI made no change for Moscow Exchange.> TCS to be included in the MSCI Russia Small-Cap, not Standard. Inclusion into the small-cap index also implies being added to the MSCI Russia Investable Market and MSCI EM Investable Market indexes. We would expect minimum passive flow into the stock from trackers of the EM IMI index to total some $14 mln, equivalent to 2.3 times TCS's daily Moscow ADT. > At first blush, TCS entering the standard index family, which implies nearly three times more passive allocation than the IMI indexes alone, has now grown harder. Not only would TCS have to solidly outperform - though more volatile variables are involved, a rough estimate would require it outperform the MSCI EM by at least 18% between now and a subsequent semiannual index review. Also, MSCI could demand an additional 50% market cap premium on top of that if the index provider's already allocated number of companies for Russia in the standard indexes is already full. While we believe Russia's number of included companies is currently below the soft cap, this is an additional impediment dependent not only on TCS's performance itself but also trends in the broader Russian and EM universe. Hence, while we continue to consider the company among the most relevant candidates for a later standard index inclusion in the coming semiannual reviews, we would not consider it likely at this stage. > Other small-cap announcements. MSCI also announced that M.Video and Safmar Financial would be excluded from the small-cap indexes.> Broader EM changes. The MSCI EM Standard Index will see a net 75 additions and 88 deletions, and will increase in indexed market cap by 2.5% on pro forma numbers. As usual, the bulk of the changes will come through Asia, especially China. The latter will see 56 additions and 45 deletions. Revised guidance for the MSCI Kuwait's planned entry to the EM family in December implies a 0.6% country weight, in line with our previous estimates.> Other wide changes for EM/FM investors. MSCI also clarified that it will not implement changes to Nigerian securities due to prolonged problems of FX liquidity in that market, with the only exceptions being amendments that are necessary to maintained capped index rules and corporate events requiring price adjustments. The index provider also reiterated that it would not make any rebalancing changes for securities classified in Bangladesh, Jordan, Palestine or Sri Lanka due to prolonged market closures, even though bourses for three of these countries have reopened since MSCI's initial decision.The MSCI FM will see one addition (Lebanese) and five deletions.> Looking ahead. In the June annual review of markets, MSCI will consider removing Argentina from the MSCI EM and whether to include Iceland into the MSCI FM. Separately, we consider Yandex a likely candidate for inclusion to the MSCI Russia and EM indexes in the August quarterly index review. Both of these topics are covered in more depth in our May 2020 preview released last week.