What is MSCI? Understanding the MSCI Incorporation Effect

MSCI, or Morgan Stanley Capital International, is a leading provider of global equity indexes, portfolio analysis, and risk management tools. MSCI's indexes are widely used as benchmarks for investment portfolios around the world, and its incorporation or exclusion of a company from its indexes can have a significant impact on that company's stock price and market capitalization.

MSCI Indexes

MSCI's indexes cover a broad range of equity markets, including developed markets, emerging markets, frontier markets, and country-specific indexes. These indexes are used by institutional investors, asset managers, and other market participants as benchmarks for portfolio performance and as a basis for index-linked investment products such as ETFs and index funds.

Some of MSCI's most well-known indexes include:

• MSCI World Index: Tracks the performance of large and mid-cap stocks across 23 developed countries.
• MSCI Emerging Markets Index: Tracks the performance of large and mid-cap stocks across 27 emerging markets.
• MSCI EAFE Index: Tracks the performance of large and mid-cap stocks across 21 developed markets outside of North America.

MSCI Incorporation Effect

The MSCI incorporation effect refers to the impact that a company's inclusion or exclusion from MSCI's indexes can have on its stock price and market capitalization. When a company is added to one of MSCI's indexes, it can experience a significant increase in demand for its shares as index-linked funds and ETFs buy shares to align their portfolios with the index.

Conversely, when a company is excluded from an index, it can experience a significant decrease in demand for its shares as index-linked funds and ETFs sell shares to remove them from their portfolios. This can result in a sharp decline in the company's stock price and market capitalization.

Future Outlook

As global equity markets continue to evolve, MSCI's role in providing indexes and portfolio analysis is likely to become even more important. With the increasing popularity of passive investing and index-linked products, the incorporation or exclusion of companies from MSCI's indexes will continue to have a significant impact on stock prices and market capitalizations.

In addition, MSCI has recently expanded its coverage to include ESG (environmental, social, and governance) factors in its indexes, reflecting the growing importance of sustainability and responsible investing. As investors increasingly prioritize ESG factors in their investment decisions, MSCI's ESG indexes are likely to become even more influential in shaping the investment landscape.