The Indian stock market witnessed some big moves this week, triggered by changes to influential indexes compiled by global financial data provider MSCI. Leading digital insurance player PB Fintech saw its shares jump nearly 5% after the company was added to the MSCI India Small Cap Index. Other newly included names like engineering firm Thermax and finance major Sundaram Finance also enjoyed bumper gains of 4-5%.
Even state-run lender Canara Bank received a boost, with its stock appreciating 4.9% in anticipation of higher foreign institutional demand. MSCI’s semi-annual index reviews seek to reflect significant market changes by adding or removing companies. The inclusion of these four Indian firms is expected to trigger billions of dollars of passive inflows as index-tracking funds adjust their portfolios accordingly.
For investors, such corporate actions by MSCI present attractive trading opportunities. By identifying potential index additions or deletions in advance, one can position accordingly before the herd arrives. In this case, the inclusion plays delivered handsome single-day returns while the volume surge validated the research. Of course, it’s still important to do thorough fundamental analysis on each company rather than blindly chasing index moves.
In stark contrast to the winners, digital payments pioneer Paytm plummeted 12% after being removed from the MSCI India index. The move came as a surprise given Paytm’s scale and brand leadership in the fintech space. However, MSCI cited concerns around the company’s “low liquidity and wide bid-ask spreads” to justify the deletion. For Paytm shareholders, it was a painful reminder that index inclusion is not guaranteed even for prominent firms.
The stock will now lose the passive inflows linked to its MSCI weighting, placing more importance on fundamentals for future price performance. Investors may also question the company’s recent decision to spend heavily on new businesses instead of prioritizing profitability. With top index providers like MSCI wielding influence, Paytm will need to address issues around liquidity and valuation to regain lost ground.
Overall, this week’s MSCI reshuffle highlights both opportunities and risks associated with index changes. By anticipating such corporate actions and their impact, nimble traders can capitalize on short-term price dislocations. However, long-term investors are wise to focus on a company’s competitive position and financials rather than rely solely on index membership. As always, doing thorough research remains key to making profitable decisions. On the other hand, share of Paytm parent One97 Communications fell in trade after the stock was thrown out of the MSCI Global Standard index. Nonetheless, it made its way into the MSCI Smallcap index
