Macquarie, an Australian brokerage firm, predicts a significant boost for HDFC Bank in the upcoming MSCI India Index rebalance scheduled for August. Its analysis suggests the bank’s weight in the index could double, potentially bringing $5.2 billion or 281 million shares in passive buying, according to a Moneycontrol report.
In a sale note circulated to clients, Macquarie, as per the MC report, said, “HDFC Bank missed MSCI weight increase by a very small margin in the May rebalance. However, looking at the FII selling in the last two months, HDFC Bank’s MSCI India weight should double in the August rebalance.”
This weight increase would prompt passive investment funds to buy HDFC Bank shares, potentially reaching “$5.2 billion or 281 million shares into the stock,” as per Macquarie’s calculation.
Currently, HDFC Bank ranks No. 4 in the MSCI India Index, commanding a weight of 3.89%. Based on Macquarie’s calculation, this number could double, which will then close the technical overhang in the stock that was created post-merger with funds ending up with outsized positions in the combined entity compared to the index weight for the bank.
Foreign investors were overweight by approximately 800 basis points in March 2023, which is currently down to roughly 500 basis points. As the MSCI weight of HDFC Bank doubles from 3.82% currently to 7.64%, this 500 basis points overweight position would go below 100 basis points because of the combined effect of index weight going up and foreign holdings increasing on passive buying. “I feel finally the technical overhang will be behind us,” the note read.
The MSCI index considers the portion of a company’s shares available for foreign purchase (foreign room) when assigning weight.
The MSCI index considers how much of a company’s stock is available for foreign investors (called “foreign room”) when deciding how much that company counts towards the index. Here’s the breakdown:
Ideal scenario (25% foreign room or more): If enough stock is available for foreign investors (at least 25% of total shares), the company’s full market value is reflected in the index.
Partially available (15% to 24% foreign room): If there are some restrictions on foreign ownership (between 15% and 24% foreign room), the company’s weight in the index is discounted by half.
Not available for foreign investors (less than 15% foreign room): If foreign ownership is heavily restricted (less than 15% foreign room), the company is entirely excluded from the investable universe of the index.
Even if foreign buying trends reverse after the weight increase, there’s minimal risk of a weight reduction. The index methodology discourages frequent adjustments.
Macquarie’s recommendation:
Buy HDFC Bank! Macquarie believes the technical overhang will be resolved, and any foreign investor activity (selling or buying) will ultimately benefit the stock.
According to the Macquarie note, “With technical issues almost behind us, I would recommend buying HDFC Bank! Any market sell-off by FIIs will mean HDFC Bank for sure sees MSCI weight doubling in August. Any market buying by FIIs is anyway good for the stock.”
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