Can investor sentiment for a stock improve if it becomes a constituent of a major global index, such as MSCI India? Our analysis finds it does not.

MSCI, or Morgan Stanley Capital International, in its recent semi-annual index review added six stocks to the MSCI India Index from May 31; namely Asian Paints, Bank of India, Dabur India, Mundra Port, Shriram Transport and Titan Industries.

Since May 16, the day MSCI made the announcement, Sensex has lost nearly 200 points so far. But the six stocks included in the index have gained between 3.5 per cent and 7 per cent during this period.

A performance analysis of the stocks that were either included or excluded from the index in the past showed most of these scrips outperformed Sensex three months prior to their inclusion, but underperformed or performed in line with the broader market after that.

Over the past two years, MSCI has included 16 scrips and excluded seven from the MSCI India index. This number excludes the six latest inclusions.

MSCI had included PowerGrid to the index on February 10, 2011, after leaving it out in its November 2009 review. The stock had declined 6.52 per cent in the three months before the announcement, when Sensex had fallen 16.34 per cent. However, in the three months after the announcement, PowerGrid gained 7.34 per cent compared with 6.01 per cent rise in the BSE benchmark.

But while the scrip had outperformed Sensex before its inclusion in the MSCI Index, it performed in line with the broader market after the inclusion.

On November 10, 2010, MSCI added Canara Bank, IndusInd Bank, LIC Housing Finance, Lupin and UltraTech Cement in the India index.

Canara Bank and IndusInd Bank slipped 34.82 per cent and 24.42 per cent, respectively, in the three months after their inclusion. The same stocks had risen 69.47 per cent and 30.31 per cent in the three months before the announcement, compared with 14.57 per cent gain on Sensex.

Similarly, LIC Housing, Lupin and UltraTech Cement tumbled between 19 per cent and 40 per cent in the three months after the announcement, compared with an average 22.86 per cent rise in the three months before the announcement. The scrips outperformed the benchmark index in the three months before their inclusion, but underperformed after they started featuring in the index.

In the meantime, MSCI excluded RNRL from the index due to its merger with Reliance Power.

Even over a longer time frame of six months, the five stocks underperformed Sensex after their inclusion in the index.

The BSE benchmark lost 11.32 per cent in the six months after the announcement, while these scrips declined between 17 per cent and 48 per cent.

“The inclusion of a scrip in a known index, such as MSCI India, brings in liquidity to the counter. As many funds track such indices, these stocks show an upward trend in the extreme short term as fund managers align their portfolio with the changes. However, after the allocations, most of the scrips see underperformance over the next few months,” said Vivek Mahajan of Aditya Birla Money.

At present, 25 global funds, including 17 open-ended funds, four exchange-traded funds, three close-ended funds and one fund of funds track the MSCI India index. These 25 funds together have total assets under management of $10.35 billion.

In comparison, 73 funds track Sensex with assets worth $14.30 billion. This shows the importance of MSCI India index from the Indian market’s perspective.

Last year, on May 11, MSCI added Adani Enterprises, Piramal Healthcare and Rural Electrification Corporation to the MSCI India index.

Except for REC, all other scrips outperformed the broader market index in the pre-announcement period, but performed slower or in line with the broader market in the post-announcement period.

In the three months before the announcement of its inclusion in the index, Adani Enterprises gave 19.57 per cent return, but it gained just 5.35 per cent in the three months after the announcement. Shares of Piramal Healthcare, too, showed a similar bahaviour.

REC remained an exception as it advanced 21.34 per cent in the three months after the announcement, compared with 17.69 per cent rise in the three months before. Sensex had gained 5.41 per cent in the three months after the announcement and 6.10 per cent before. REC continued with its performance over the next six months, gaining 30.07 per cent at a time when Sensex climbed 20.11 per cent.

“A scrip with an edge in its sector is generally included in the index. Sometimes large institutional investors and fund houses get to know in advance which scrip will be included or excluded and they take exposure to those stocks in advance. That could be one reason why many stocks outperform the market before the inclusion announcement, and then remain subdued over the next three to six months,” said DD Sharma, head of research at Anand Rathi Financial Services.

Stocks that have seen inclusion and exclusion from the index over the past two years include names from across sectors.

On November 11, 2009, MSCI excluded Glenmark Pharma and PowerGrid to bring in HDIL and Suzlon Energy. Unitech was excluded in May, 2009, but included again on August 12, 2009. Satyam was included in the index on August 12, 2009. On May 13, 2009, Bajaj Auto, Idea Cellular, United Phosphorus made it to the list while Essar Oil, Indian Hotels, Tata Communications and Unitech were left out.

This was the time when the market was gaining ahead of the election results and Indian Hotels and Unitech actually outperformed Sensex over the next six months in spite of their exclusion from the index.

amitmudgill@mydigitalfc.com