MSCI tweaks methodology ahead of May index review; 3 Adani group stocks could still make the cut

According to the new changes, securities that exhibit extreme price increase will not be eligible for addition into the MSCI Standard Indexes.
(Image: REUTERS)

Global index provider MSCI (Morgan Stanley Capital International) has tweaked its methodology of picking stocks that could be added to its indices during the May semi-annual review. Despite the change, domestic brokerage and research firm Edelweiss Securities believes Adani Total Gas, Adani Enterprises, and Adani Transmission could still make the cut. “After reading the new methodology and analysing the numbers we continue to believe Adani Group of stocks hold high probability of getting included in MSCI Standard Index in May Review which will get announced on May 12, 2021,” they said.

What changes?

According to the new changes, securities that exhibit extreme price increase will not be eligible for addition into the MSCI Standard Indexes. These, however, will continue to be considered as part of the market investable universe, according to Edelweiss. Such stocks would still be considered for inclusion in the indices in the subsequent reviews. 

MSCI has said that it will evaluate the 5-day to 60-day excess returns of securities till the cut-off date. Securities with excess returns above 100% for any of its 5- day to 20-day period, or above 200% for the 25-day to 40-day period, and so on, would be considered to exhibit extreme price increase. “Excess return is calculated as the difference between the return of a security for the relevant period and the average return of Investable Market Indexes (IMI) constituents belonging to the same country-sector where the security is classified,” analysts at Edelweiss wrote. 

Adani group stocks still make the cut

The three Adani Group stocks are still qualifying to be included in the MSCI indices. “MSCI have given excessive returns threshold for inclusion and even after considering simple returns (without excessive returns to benchmark stocks), the price move in Adani Total Gas, Adani Enterprises, and Adani Transmission is far lower than the threshold set by the index provider,” Edelweiss said. In all the 5-day to 60-day periods, the three abovementioned Adani Group stocks have given stellar returns but are below the excess return threshold. 

Weightage of Adani Enterprises in the MSCI standard indices is expected to be 0.49%, followed by 0.44% each for Adani Total Gas and Adani Transmission, according to initial estimates provided by Edelweiss. The brokerage firm expects $243 million inflows for Adani Enterprises, $221 million for Adani Total Gas, and $218 million for Adani Transmission.