What is the MSCI rebalancing?

Last May 31, trading volume in the Philippine Stock Exchange Index (PSEi) surged to PHP 24.2 billion or about 6x-7x more than the usual trade value. This came as funds complied with the changes in the Morgan Stanley Capital International (MSCI) index at the close of the market. The rebalancing caused foreign transactions to balloon where foreigners ended as net sellers by PHP 4.15 billion.

What is the MSCI rebalancing?

MSCI is known for its World, Emerging Markets, and All Country World Index (ACWI) indices, which aim to represent the performance of global markets, emerging markets, and a comprehensive view of global equity markets, respectively. MSCI constructs these indices using specific criteria such as market capitalization, liquidity, and industry representation.

Additionally, MSCI offers country-specific indices covering a wide range of countries, including China, India, and the Philippines.

Meanwhile, an index rebalancing is a quarterly process done by the MSCI to adjusts the composition of its indices. Certain stocks may be added or dropped based on market conditions identified by MSCI’s tools and criteria. The goal of rebalancing is to update the decision support information MSCI provides to its clients via its indices to most accurately and effectively reflect the market.

What is the purpose of the MSCI rebalancing?

Rebalancing the MSCI index adjusts the index’s representation of companies based on their current performance. This reflects changes in a company’s stock value and its industry’s overall state, providing an accurate and updated benchmark for investors. While rebalancing does not directly affect a stock’s performance, it can indirectly influence stock prices due to changes in demand from index-tracking investors.

The primary goal of rebalancing is to ensure that the index continues to be a relevant and reliable tool for tracking market trends and performance.

For example, Monde Nissin Corporation (MONDE) was removed from the MSCI Philippines index last month following an 8.26% slip in its share price. MONDE’s underperformance and resultant negative impact on the MSCI Index led to the decision to entirely delete MONDE – a move that stood out as the only complete deletion or addition of a company from the index this year. Ayala Corporation (AC) saw its weight increase, while SM Prime Holdings Inc. (SMPH), JG Summit Holdings Inc. (JGS), Ayala Land Inc. (ALI) and PLDT Inc. (TEL) saw significant weight decreases.

What is the impact of the MSCI rebalancing?

The rebalancing of the MSCI Philippines index has the potential to increase or decrease the prices of certain stocks if they were added or dropped from the index.

Following a rebalance, it is likely that there will be short-term stock market volatility as investors adjust their portfolios according to new information. This volatility is likely to lead to a temporarily increased trading volume as investors and index funds buy and sell according to changes made to the MSCI index during rebalancing.

Additionally, the effects of the MSCI rebalancing including those listed above are likely to have an amplified effect on foreign investors. A significant number of investors in nation-specific MSCI indices, like the Philippines Index, are often foreigners seeking diversified exposure to that particular market. These foreign investors often heavily depend upon the MSCI index as their primary if not sole source of market insight when making investment decisions.

Local investors typically have a good understanding of their home market, so they may not rely on tools like MSCI indices as much as foreign investors do. As such, any changes made during the rebalancing of an index will have a relatively large effect on investments made by foreign investors who may increase, decrease, or rebalance their own investments in Philippine stocks.

Overall, the MSCI rebalancing will impact the stocks of companies directly involved. It is likely that companies dropped from the index will see a decrease in stock price while the inverse is true for companies that are added to the index.

But the effects of this rebalance have the potential to affect the market beyond publicly-listed companies affected. Notably, there may be a change in overall foreign investment or in where these foreign investors are putting their money.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, , and Korean pop music.

RENZO TAN AND MARCO SIY are supporting the Institutional Investors Coverage Division (IICD). Renzo is currently studying at UMass Amherst while Marco is studying at Georgetown University’s McDonough School of Business. Both are avid foodies and somewhat arachnophobes.