India Surpasses China in MSCI Emerging Markets Index

India’s recent rise to become the largest weighting in the MSCI Emerging Markets (EM) Investable Market Index (IMI) marks a significant milestone in the global financial landscape. This change raises the question: Is it beneficial or detrimental for Indian equities?

Increased Attention from Global Investors

A larger weight in the MSCI EM index indicates higher global investor interest, which is favorable for India. As India overtakes China as the largest component of the MSCI EM IMI index, it is set to draw more foreign portfolio flows.

Global investors following these indices will likely increase their exposure to Indian equities to align with the new index composition. India’s current underweight status in average EM portfolios enhances the potential for foreign inflows, as Indian equities have historically been underrepresented in global portfolios.

Portfolio Adjustments

With its growing weight and a near 2% allocation in the global index, India has transitioned from being a mere tracking error to a significant component that cannot be overlooked. Consequently, global funds may have to purchase Indian exchange-traded funds (ETFs) or invest directly in Indian stocks.

However, Indian domestic investors have been outbidding foreign investors, which complicates foreign portfolio flows.

Need for Expanded Issuance

There is a pressing need to increase the issuance pipeline to provide opportunities for foreign investors. Analysts from Morgan Stanley anticipate greater foreign participation in the Indian market in the upcoming months.

Caution Amid Positivity

While increasing index weight is generally a positive sign, it could also indicate market exuberance, potentially preceding periods of underperformance as witnessed with China. However, the situation in India is distinct, and its rising weight could reflect strengthening fundamentals, such as a larger free float and increasing relative earnings.

Risks of Short-Term Corrections

Despite these positive indicators, short-term market corrections cannot be ruled out, especially in a robust bull market. Morgan Stanley’s analysts acknowledge that India’s rising share in global GDP and market is a promising long-term trend, provided corporate earnings remain strong. However, they warn that market corrections may be on the horizon due to investor concerns and market dynamics.

India: A Top Emerging Market

Despite potential short-term setbacks, India is seen as a leading choice among emerging markets by Morgan Stanley. The nation’s sturdy economic fundamentals and its escalating weight in global indices present an attractive option for long-term investors.

In the Asia-Pacific region, India ranks as Morgan Stanley’s second preference after Japan, underscoring its significance in investment strategies.

Buying Opportunity

Potential corrections in Indian equities may provide a buying opportunity for investors waiting for the right moment. Analysts believe any market corrections will likely be mild, attracting more investors looking to capitalize on lower prices. This suggests that while the bull market may still have room for growth, India’s weight in the EM index could continue to rise before reaching its peak.