Morgan Stanley announced that India has become the largest weighting in the MSCI EM IMI, overtaking China yesterday and its weight in the EM index is knocking on the threshold to be the largest.
MSCI EM IMI index captures large, mid and smallcap stocks across 24 emerging markets. With 3,355 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country.
After a reshuffle last month in MSCI indices, analysts had estimated that Indian equities could see inflows of about %4-4.5 billion.
Given the current pace and momentum, India could potentially cross 22% weightage in MSCI EM index by year-end, according to Nuvama Alternative & Quantitative Research.
Is this good or bad news for Indian equities?
“A rising weight essentially means more absolute foreign flows. The problem for foreign portfolio flows is that the domestic market participants are outbidding them. This is why the growing issuance pipeline is important for rising foreign participation,” Morgan Stanley said.Rising index weight can be a tell-tale sign of exuberance, the brokerage said, adding that it could also be happening due to fundamental factors such as improving free float and rising relative earnings.While calling India top pick in an EM context and No. 2 pick in Asia-Pacific context, it said fundamental factors definitely apply to India and, to that extent, India’s new found position in EM is not a worry.
The brokerage, like many other investors, is of the opinion that corrections in stocks could drive money on the sidelines to pour in, making such corrections relatively shallow.
A bull market peak is possibly still in the future and India’s weight in the EM index could have some more distance to travel before it peaks, Morgan Stanley analysts wrote in a note.
So far in the calendar year 2024, MSCI EM index is up 7%, while Nifty has outperformed with a 15% return in USD terms. On the other hand, Chinese equities have rallied 10%.
MSCI India has rallied 22% in USD terms year-to-date and outperformed other global indices by a wide margin.
Last week, Bernstein had told clients to look out for select narrow pockets of relatively moderate valuations, strongly supportive themes that drive a rerating, or non-linearity drivers among stocks.
“Broad returns can continue for some time, but the disparity within stocks is likely to increase as many fundamental challenges finally start to unravel,” Bernstein’s Venugopal Garre had said.
Domestic brokerage Emkay Global has raised the Nifty target to 26,000 for October 2025 saying that the upside is limited and there could be an extended period of sideways movement.
“We see the broader market range-bound with speedy sector rotation. Indian equities steamrolled through a rocky 1HFY25, with the Nifty delivering 13.02% returns since 31-Mar-24. The key themes for a relatively serene 2H are rate cuts and a possible revival in rural and mass consumption,” said Emkay’s Seshadri Sen.