4 mins read . 12 Apr 2023
Morgan Stanley Capital International (MSCI), the investment research and index management arm of Morgan Stanley, could give a boost to the demand for Kotak stock. MSCI provides stock indexes, portfolio risk, and performance analytics, which are the global benchmark for passive funds across the world. For Kotak Bank, MSCI may drop its Limited Investability Factor (LIF) constraint during its upcoming May quarterly review. What does that mean?
For Kotak Mahindra Bank, this implies an increase in their weight in the MSCI India index from 1.38% to 2.68%. At current benchmarked portfolio levels, this could translate into likely inflows of $950 million into the Kotak Bank stock. It is estimated that passive MSCI tracking funds may end up buying about 44.27 million shares of Kotak Mahindra Bank for rebalancing the new weight. This rebalancing is necessary since these passive funds peg their portfolios exactly to the weightage of stocks in the index they track.
The MSCI India Indices are a family of benchmarked indices. These indices are weighted on 3 parameters: returns, total turnover, and market capitalization. Foreign investors (FIIs) tend to invest extensively in international markets, especially in emerging markets like India. However, for many large global funds, active investing and stock selection for alpha may not be worth the while. More so, at a time when the Sensex has given 16.5% CAGR returns over the last 42 years. When the weightage of a stock is increased in any of the MSCI Indices, the portfolio investors will have to buy into the stock to rebalance it to the index level. That is where Kotak is going to benefit.
It is an adjustment factor applied to the free of float available of various securities. The LIF also factors in variations across regions, market cap segments, sectors, and styles in a bid to maintain fairness in the market. The LIF determines the Foreign and Domestic Inclusion Factors to reflect limitations in investments by the respective parties into equity markets and securities.
As of 31st March 2023, the foreign room for Kotak Mahindra stood at 25.02%, which is a considerable increase as compared to just about 20% some two years back. This results in an improvement in FPI relevant float. This increase is mainly a result of Foreign Passive Investors selling their shares over the previous quarters, dropping their holdings from 45.09% in December 2020 to 37.78% in March 2023. This can be attributed to foreign investors selling across most banking stocks in emerging markets.
As iterated earlier, a push-up in the MSCI India weightage for Kotak will compel investors to buy their stocks at higher prices, as greater returns are guaranteed. A lot of investments are expected from the passive MSCI trackers (predicted at $44.27 million by the close on May 31), who tend to segregate their investments based on the weightages of stocks on indexes. In totality, $950 million is expected to be collected through passive flows. That kind of flows is surely likely to be a boost for the stock price.