India may lose out in Morgan8217;s free float8217;

quot;Asia is the most vulnerable region to the application of free floats by MSCI. Malaysia is particularly exposed as the three largest stocks in the Malaysian index have restricted free floats,quot; Ben Rudd, emerging market equity strategist at HSBC said in a research report published on Monday.

The changes aim at a better reflection of how much of an individual stock is available for purchase on the market rather than held by non-quoted companies, individuals or governments. MSCI has been consulting for months with fund managers on changes to how it measures the free float.

For example, the maximum investment possible by non-domestic investors in India is 40 per cent of the equity capital of a company. But shares in Britain and the US have free-floats that average more than 90 per cent. If Morgan cuts India8217;s weightage based on the low free float8217;, FIIs are likely to pull out funds.

Its own consultation paper shows the Malaysia Free, China Free, Jordan, Pakistan and India indices have the smallest free float available for non-domestic investors at between 20 and 30 per cent. Indian companies have the option to raise that figure to 40 per cent and most are expected to do so. Taiwan is the one unambiguous winner in Asia, according to HSBC8217;s Rudd.

However, even if there are dramatic changes on the way, many fund managers say the immediate impact of changes on investment flows will be limited.In Malaysia for example, few foreign investors have returned after the imposition of investment controls.

The poor performance of emerging equities as an asset class this year with a 32 percent selloff has in any case forced many investors out of the market. quot;Emerging markets have been out of favour for some time, a large number of people have already exited and you are left with the rump of the money, which tends to be high risk in any case,quot; said Ashok Shah, head of emerging market investment at fund manager Old Mutual.

Analysts say that second-guessing MSCI is an unrewarding process, especially as the indexer has not announced how hard its free float rules will be. The options range from a partial change, which would still run the risk of overweighting some relatively illiquid companies, all the way to a hard free float.

MSCI said in its consultation paper the latter would be the most simple option but could cause serious distortions by penalising those countries with good disclosure of information. It could also lead to undesirable distortions, resulting ina discrepancy between the weight of a company in the index and its actual economic size, measured by market value.

If a hard rule is imposed, the difference between the winners and losers would be magnified and Asia would be an even bigger loser, according to HSBC8217;s calculations.

Rudd said Asia8217;s weighting in the Emerging Markets Free Index would fall to just 40.2 percent under a pure float rule compared with 42.6 per cent under a softer interpretation and 46.5 percent at present. Emerging Europe, Middle East and Africa would rise to 29.7 per cent under a pure float from 29.2 percent under a quot;softquot; interpretation and 27.5 percent at present.

Latin America would rise to 30.1 percent under a hard interpretation from 28.2 per cent under a soft rule and 26 percent at present.

Morgan Stanley cuts global stock exposure

Morgan Stanley Dean Witter amp; Co, a top Wall Street securities firm, on Monday told clients to cut back on stocks worldwide for the second time in three months because of an expected slowdown in profit growth.

Instead of equities, Morgan Stanley said investors should be buying bonds and raising cash as the world economy slows faster than previously forecast.quot;The world environment is getting tougher for equitiesquot; even as equity markets are still expensive, Jay Pelosky, who co-chairs Morgan Stanley8217;s Global Asset Allocation Committee, told Reuters.

Morgan Stanley reduced the stocks weighting in its global balanced model portfolio to 68 per cent from 72 per cent and increased the bond component to 21 per cent from 18 per cent. Pelosky also increased the cash weighting in the portfolio to 6 per cent from 5 per cent. quot;In this kind of market, investors want to be in thesegments where downside risk in price is minimal,quot; Pelosky said.

The allocation to the alternative assets group, which includes commodities and real estate, was left unchanged at 5 per cent. Pelosky last changed asset allocation on Sept 18. Global economic growth should slow to 3.8 per cent in 2001, Pelosky said, a drop in Morgan Stanley8217;s forecast of 4.2 per cent just three months ago. Pelosky said it was likely global economic growth could fall as low as 3.3 per cent next year, and said there was a 40 percent chance of a hard landing, where worldwide economic growth could slow to 2.5 percent.

quot;Investors should be cautious and defensive, focusing more on capital preservation than capital appreciation, Pelosky said in a note to clients. If the world economy grows at 3.8 per cent, Pelosky forecasts average earnings per share growth of 10 percent; if world growth is 3.3 per cent, earnings per share will grow by 5 percent, he said.

Morgan Stanley advised its clients to put most of the additional 3 percentage points in fixed income into European government bonds, with a slight increase in US Investment grade corporate bonds. European government bonds are 48 percent of the fixed income position in the model portfolio, said Pelosky.

Morgan Stanley reduced the stock weighting in the global equity model portfolio to 90 percent from 94 percent, and increased cash to 10 per cent from 6 per cent. North American stocks account for 49 per cent of the portfolio model compared with the 52 percent North American component in the Morgan Stanley All Country World Index.

Morgan Stanley cut the European component of the model portfolio to 28 per cent from 31, compared with a 30 per cent weighting in the Morgan Stanley All Country World Index. Stocks based in the region classified as developed Asia, excluding Japan, were cut to 2 per cent from 3 per cent, compared with a 3 per cent index weighting.

The emerging markets component was left unchanged at 7 per cent, while Japan was left unchanged at 14 per cent. Both are overweight positions compared with the benchmark index.