Following the rebound in domestic equities from the year’s low late in March, the weight of Indian stocks in the MSCI EM index has risen from 12.97% at the end of January to 14.21% currently, the highest rise among peers in the basket.
Passive funds structure their investment basket in emerging markets on the basis of the index weights – higher the weight, the more the likelihood of fund flows into India.
The weight of Taiwan, currently number 2, has risen from 14.42% to 14.77% during the period under review, while China’s weight declined from 33.49% to 30.67%, according to Bloomberg data.
The MSCI India has rallied 9% so far this year, compared with the MSCI Emerging Markets’ 3% increase and 0.5% by MSCI China.
Last week, global investment bank Morgan Stanley upgraded India’s rating to ‘overweight,’ downgrading that of Taiwan and China to ‘equal weight.’
China’s Loss a Gain for India
“Given the current momentum, outperformance to most of the peers, and strong inflows, I believe India has the potential to command a weight of 17%-plus in the MSCI EM Index within the next 15-18 months,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. “The rise of India in the global passive index plays a critical role in driving steady and persistent FIIs’ (foreign institutional investors) passive flows.”
India’s position on the emerging markets index has mostly strengthened in the past three years due to a lower appetite for stocks in China, which enjoys the highest weightage in the index. After stagnating at around 8% until October 2020, India’s weight almost doubled to 16% in November 2022. However, due to a selloff in Adani Group stocks at the end of January after the Hindenburg Research report, India’s weight fell to 12.97%, losing the second spot to Taiwan. India had captured the second spot from Taiwan in August last year.
The implementation of India’s new regime of foreign ownership limits in 2020, strong growth prospects and outflows during most of 2022 sparked interest among foreign fund managers when the Sensex and the Nifty hit their yearly lows in March.
After selling equities worth Rs 1.26 lakh crore in 2022, foreign portfolio investors (FPIs) have invested Rs 1.25 lakh crore in Indian shares so far this year. FPIs put in more than Rs 1 lakh crore and 1.73 lakh crore in 2019 and 2020, respectively.
While reiterating its bullish stance on the country, Morgan Stanley’s mid-year outlook said India’s valuation premiums with respect to EMs and China had moderated significantly from last October’s high, and started to spike again.
“Structural reforms have taken place in the last few years and are currently bearing fruit, unlocking growth opportunities that were previously stagnant,” Morgan Stanley said in its note last week.