Latin America to diminish in MSCI index weighting shift

Proposed changes to the MSCI Equity Indexes family will see Latin America having a diminished influence within the MSCI Emerging Markets Equity Index, as MSCI plans to adjust the weighting of companies to replicate the voting of freely floating stock.

MSCI’s proposals – which have been put out for consultation – would impact mainly Latin American markets, where preference shares, which do not carry voting rights, have long been the norm. It would mean Latin America’s representation in the Emerging Markets Index would fall from 13 percent to 10.7 percent. It also represents a gradual decline in weighting from 25 percent in 2002.

Consequently, Brazil’s weight in the MSCI Emerging Markets index would fall by 21.8 percent. And two major Brazilian companies – retailer Grupo Pão de Açúcar and paper products company Suzano Papel e Celulose – would be removed from the index altogether.

The proposed changes would, in turn, push Asia beyond 75 percent of the global emerging market benchmark. The proposals come amid moves by Asian technology companies to list with dual-class share structures. Recently Singapore Exchange said it would allow such dual-class structures for the first time, while the Stock Exchange of Hong Kong has set out plans to follow this approach in the second half of the year.

Lionel Ebener, vice president of equity research at MSCI, tells IR Magazine: ‘MSCI launched a public consultation on the treatment of unequal voting structures in the MSCI Equity Indexes. Under the proposal, MSCI would adjust the weights of stocks with unequal voting rights in the MSCI Equity Indexes to reflect both their free float and their company-level listing voting power. MSCI proposes to apply the changes, if adopted.’

MSCI is inviting feedback from market participants before May 31 and will announce the results of the consultation on or before June 21, following which the changes are likely to take effect.