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Changes in indices, market swings and all that

Hiten Jhaveri

India's stockmarkets are continuing to react to the changes in the Morgan Stanley Capital International's stock weightages that were announced yesterday. Prices of stocks that were yanked off the MSCI India Index are being hammered down. Those that made it to the list are receiving buyers' attention.

While the stock price of Wipro Limited, whose weightage was slashed from 100 per cent of market capitalisation to 30 per cent, plummeted 12 per cent, other new entrants like Zee Telefilms, Escorts, Sun Pharma, Himachal Futuristic have posted impressive gains. (Other new entrants are Aptech, Digital Equipment, DSQ Software, Essel Packaging, Global Telesystems, Hughes Software, Jaiprakash Industries, Pfizer and Silverline.)

And to think these changes are part of the quarterly update of MSCI's world stock market indices! These updates were never published prominently by the Indian mass media before, let alone the stockmarket reacting to them in a major way.

How come the latest update has become news worthy of the front page of India's business newspapers?

The last update of MSCI India Index was on February 18, 2000. Wipro Limited was included then. Its stock price closed at Rs 8,911 that day (Friday).

Wipro hit the upper filter at Rs 9,624 on February 21 (Monday). That was its historic top. The stock has crashed to Rs 2,085 on May 18, a decline of 78 per cent in three months after it was included in the MSCI index.

Investors would be well advised to exercise caution and not get carried away by media overkill. It transpires that the MSCI index does not have a dynamic process of giving weightages according to the stocks' market value. Is it decided manually by taking into account the investments of Morgan Stanley's mutual funds?

Leading stocks like NIIT, Pentamedia, HCL Technologies and MTNL have not been included in the index. Why Escorts, Essel Packaging and Jaiprakash Industries have been included, is not easy to understand. Jaiprakash Industries is a loss-making company. It has not paid dividends for the last four years.

Zee Telefilms's market value has been taken at only 60 per cent though the market with its millions of investors values the stock at its current market capitalisation.

Moral of the story: addition or deletion from a popular or hyped up index will not change the profitability of a company much less strengthen/weaken the economy.

Hiten Jhaveri is director, StockWhizo Investments, Bombay, and specialises in stockmarket forecasting, portfolio management and corporate advisory consultancy services.The article is based on his personal views. His email is hiten@stockwhizo.com.

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