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'MSCI downgrade won't affect market much'

The recent downgrading of India by the Morgan Stanley Capital International Emerging Markets Free Index (MSCI Index) was expected to add further damage to the Sensex but fund managers and market players now say that the reduction in weightages would have a minimal impact. This is because most fund houses rely on their own perceptions of the market rather than on the MSCI Index.

"Most of the large funds do not follow the MSCI Index and hence the downgrade of the India Index will not impact the portfolio outlay. Most funds follow the bottom-out approach," said a fund manager at SBI MF.

He added that the market would not go down because of the downgrade by MSCI but due to other factors. "FII buying is on the basis of valuations and is limited to individual stocks rather than the overall sector," the fund manager said.

The MSCI Index has reduced India's weightage by 3 per cent to 4.49 per cent, which is still higher than market expectations. In fact, this fall has been the highest in India's case closely followed by Mexico with 2 per cent. The big gainers have been South Africa with 4.33 per cent and Korea with 3.27 per cent.

The MSCI Index's downgrading of India on Saturday gave birth to rumours in the market about how badly sentiment had been affected. The widespread fears of the Sensex opening lower turned out to be totally off target. On Monday, the market moved in a narrow trading range with minuscule gains.

Market pundits, speculators, investors are perplexed at the Sensex's resilience, which has shrugged off the badla ban and has now blithely disregarded the MSCI downgrade.

Deepak Agrawal, associate vice president, Kotak Securities, said that the recast of MSCI's India Index would not have an impact on any particular sector but only the downgraded scrips. "Hindustan Lever Ltd, which has been downgraded in the MSCI weightages, is witnessing a downslide on the Bombay Stock Exchange. Other than that, the market is showing no nervousness due to the MSCI downgrades."

Most fund managers said that the MSCI Index had not taken into account the permission to increase the FII limit to 49 per cent in certain scrips like RIL, Reliance Petroleum and HDFC. Their view was that once MSCI took this into account, the reduction in weightages, which seems steeper now, would be much more comfortable.

In what is turning out to be a perplexing phenomenon, the FII buying (net buying to the tune of Rs 8.1 billion in the equity segment in the current month) continues despite a plethora of negative factors like political instability, the infamous stock market scam and the very recent badla ban-rolling settlement imbroglio.

In fact, the buying is not restricted to counters like infotech, pharmaceuticals and cement, but also to the B category (relatively unfancied stocks) stocks like Bata, Wartsila, McDowell and others.

The perception is that the FIIs don't want to put all the eggs in one basket - as experienced during the technology run in 1999-2000 - but spread their risks. "The FIIs now are also investing in B category scrips which is an indication that the MSCI Index plays only a marginal role in determining one's portfolio allocation," said a dealer at KR Choksey Shares and Securities Ltd.

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