JPM - MSCI reclassification a technical positive for Russia

Reclassification of MSCI Indexes is expected today.
According to MSCI Barra, it may announce the decision to reclassify some index members today. MSCI specifically confirmed that two countries, South Korea and Israel, might obtain a developed market status. This would lead to the exclusion of the duo from the MSCI Emerging Market indexes.

The remaining members of the indexes would get a bigger weight …Assuming both Korea and Israel are upgraded, Russia’s weight within theMSCI EM EMEA Index would increase by 5.1 p.p. to 37.4% from 32.3% currently. Within the MSCI GEM Index Russia’s weight would jump 1.3p.p. to 11.2% from 9.9%.

Of the shrunk pie. The reclassification means enlargement of the developed market’s total capitalization at the expense of the emerging markets.

Still reallocations are likely, who is to benefit? In contrast with the funds having country-specific mandates, the funds with the emerging market mandates (regional or GEM) would have to do re-allocations meaning inflows for the remaining members of the indexes. It goes without saying that the additional funds would most likely be efficiently deployed with the most liquid names. The sector composition of the would-be-exiting members suggests a bias in favor of telecom/techs, industrials and financials.