A financial maneuver set to send ripples across global equities, India is gearing up to receive a substantial inflow of $3,595 million as the US Federal Retirement Thrift Investment Board (FRTIB) readies itself to switch benchmark indices for international funds. This strategic move is expected to mobilize approximately $28 billion (Rs 2.3 lakh crore) in global equities, and India is positioned as one of the primary beneficiaries of this substantial windfall, according to market analysts.
This marks a significant development for India, as it is the first time the country will receive FRTIB inflows, having not been part of the old index but now being included in the new index. The FRTIB's decision to transition from the EAFE index to the ACWI IMI ex-USA ex-China ex-Hong Kong index for its international stock investment fund is set to create a seismic shift in the market.
The EAFE index, encompassing 21 developed markets across Europe, Australia, Asia, and the Far East, will make way for the new MSCI ACWI IMI ex USA ex-China ex-Hong Kong index, which will feature a mix of both developed markets (DMs) and emerging markets (EMs). With a substantial $68 billion invested in the I-Fund that passively tracks the benchmark index, the benchmark switch is anticipated to trigger a shakeup among constituent stocks in 2024.
The transition is set to occur in 16 tranches, executed every five days over a four-month period, with a one-way trade totaling around $28 billion. Developed markets are poised to witness outflows, while emerging markets are expected to experience substantial inflows. Alongside India, Taiwan, Korea, Brazil, Saudi Arabia, South Africa, and Mexico are projected to emerge as the largest gainers within the iShares Emerging Markets ETF, as indicated by an analysis conducted by Brian Freitas of Periscope Analytics.
However, it's crucial to note that the impact of the benchmark switch will spare both US and Chinese equities, as they are not part of either the old or new index. Hong Kong, on the other hand, is anticipated to bear the brunt of the transition, being part of the old index but excluded from the new one.
Brian Freitas highlights that FRTIB will need to divest approximately $1.5 billion of Hong Kong stocks, potentially creating downward pressure during implementation by increasing floating stock for these names by 48-50 basis points (bps).
Conversely, countries such as Japan, the UK, and France face the prospect of being significant losers due to a downgrade in their weightage. Freitas' analysis estimates outflows of up to $3,904 million for these nations.
In conclusion, India's inclusion in the FRTIB's new benchmark index marks a promising turn of events for the country's financial landscape. As the global market braces for the benchmark switch, India stands out as a major recipient of investment, positioning itself for economic growth and increased market stability. Investors, however, should remain vigilant and seek advice from certified experts before making any investment decisions in light of these market developments.
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