The WSJ reports,"two of the world's largest index providers might strip out certain Russian companies from their indexes following the latest round of Western sanctions, potentially handing investors another reason to avoid the country.
MSCI Inc. late Thursday said it is considering removing VTB Bank's ruble shares from its Russian index after the U.S. Treasury Department slapped the bank with sanctions restricting its access to U.S. financial markets. It cited concerns that if VTB issues new equity, that could possibly lead to some market participants trading the shares in the secondary market, breaking those sanctions.
MSCI also said it was launching a new series of composite indexes that will exclude Russia for investors wanting to avoid exposure to Russian assets.
The move followed a similar call from S&P Dow Jones Indices LLC, which Thursday said it was asking clients whether it should remove sanctioned firms from its indexes.
"This is very bad news for the Russian market," said Maarten-Jan Bakkum, senior emerging-market strategist at ING Investment Management. "There could be some big players that decide to no longer invest in Russia, so it's natural they now have benchmarks to reflect that. There will be outflows."
Mr. Bakkum said his firm has held a smaller slice of its investments in Russia than benchmarks would suggest since before the crisis began, but it still holds some Russian stocks.
Many investors use indexes, sometimes following them faithfully, by buying assets in proportion to their makeup, and sometimes holding a smaller or larger share of certain securities, depending on their views about them. With fund managers around the world tracking benchmarks, at least in part, inclusion brings billions of dollars of investment flows.
"This is about signaling," said Tim Ash, an emerging-markets analyst at Standard Bank in London. "A lot of investors are forced to hold debt or equity because they're part of an index. So when they're out of the indices, then investors have less reason to buy them. It could have a large market impact as it could encourage people to sell existing positions they have."
S&P, a subsidiary of McGraw Hill Financial Inc., is considering whether sanctioned firms' shares should be removed from its indexes, or if a specific country adopts sanctions on a firm, whether the index provider should treat that firm as sanctioned in all jurisdictions. Russia makes up 5.4% of S&P's global emerging-markets equity index.
Still, while index firms discussing dropping Russian companies is negative for general sentiment, some investors doubt the moves will change peoples' investment outlooks.
"If investors didn't want to invest in Russia, they could have made that choice already—no one is forcing them to own Russian stocks. An Ex-Russia index is just an additional convenience for those investors," said Pavel Laberko, a fund manager at Union Bancaire Privée".
