MQ Expresso
What is MSCI Index ?
MQTrader Jesse
Publish date: Fri, 03 Jun 2022, 05:37 PM
What is MSCI?
Morgan Stanley Capital establishes MSCI Index. The MSCI index types include industries, countries, regions, etc which cover the world. It is a critical reference index for fund managers to understand the world stock market.
Typically only companies with strong fundamentals and good performance are included in the MSCI Index.
MSCI Index Market Allocation
The MSCI Index market distribute as follows:
- DEVELOPED MARKETS
- EMERGING MARKETS
- FRONTIER MARKETS
Performance measurement and attribution
The annual market classification review is based on the MSCI Market Classification Framework, which aims to reflect the views and practices of the international investment community by striking a balance between a country’s economic development and the accessibility of its market while preserving index stability.
The framework consists of the following criteria:
- Economic development: According to the sustainability of economic development.
- Size and liquidity requirements: Determines those securities that meet the minimum investability requirements of the MSCI Global Standard Indexes.
-
Market accessibility criteria: Aims to reflect international institutional investors’ experiences of investing in a given market and includes five criteria
- Openness to foreign ownership: Investor qualification requirement, Foreign ownership limit (FOL) level, Foreign room level, and Equal rights to foreign investors.
- Ease of capital inflows/outflows: Capital flow restriction level, and Foreign exchange market liberalization level.
-
The efficiency of the operational framework:
- Market entry: Investor registration & account setup
- Market organization: Market regulations, and information flow
- Market infrastructure: Clearing and Settlement, Custody, Registry/ Depository, Trading, Transferability, Stock lending, Short Selling.
- Availability of Investment Instruments
- Stability of institutional framework
MSCI Quarterly Review
MSCI Index will make an adjustment every 3 months which is in February, May, August, and November. February and August are considered quarterly reviews, therefore the weight adjustment is relatively small. However, May and November are considered half-yearly reviews, therefore the weight adjustment is relatively big.
How does it affect a company’s share price when it enters/exits the MSCI index?
Stocks which are easily traded and have high liquidity will be more likely to be selected by MSCI. For example, the stocks must have active investor participation and be without owner restrictions. The shares must include enough stock to represent the underlying equity market. At the same time, MSIC must balance the accuracy and efficiency of the stocks.
MSCI uses the same methodology to calculate the index by summing up the total value of all stocks’ market capitalization (stock price X total outstanding shares = market capitalization). The market caps of MSCI are calculated in both US dollars and local currency.
The index is updated daily depending on the market day. Furthermore, the index will be reviewed quarterly and rebalanced twice a year. Meanwhile, the fund manager will add or delete stock to make sure the index still accurately reflects the whole equity market.
MSCI indexes have the power to change the market. After the announcement of the latest MSCI report, relevant stocks will fluctuate violently in a short period. MSCI is an international reference index for fund managers to select a stock. Any company included in the MSCI index will be easier to spot by fund managers, therefore most of the fund managers will be able to recognize the company and buy the share under their portfolio.
MSCI Malaysia
MSCI Malaysia Index was also established and announced by Morgan Stanley Capital. MSCI Malaysia Index is mainly to track the performance of the company with Large and Medium Cap. This index covered 85% of Malaysia’s CSV (circulated stock value)
MSCI Malaysia Index (USD) - 35 constituents
MSCI Malaysia Small Cap Index (USD) - 63 constituents
Example of MSCI Malaysia Index (USD) - updated on May 2022
MR D.I.Y
F&N
WPRTS
Conclusion
The MSCI index classifies the market from low-risk market to high-risk market which is Developed Markets > Emerging Markets > Frontier Markets. The country involved in a lower-risk market will easier to attract international investors such as fund managers to enter the country’s market as the MSCI index is international, therefore many investors use it as an investment benchmark. When many investors are entering the country's market, the demand (investors wish to buy the share) will increase; while the supply (total share outstanding in the market) remains the same. As a result, the share price will easily go up according to the basics of the economy’s theory where the demand increases while the supply remains unchanged will cause the price to go up.
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