India has overtaken China in MSCI EM Investable Market Index (IMI) in September 2024, Morgan Stanley has said. The weight of India in MSCI EM IMI stood at 22.27 per cent compared to 21.58 per cent of China.
Morgan Stanley reported that India has now surpassed China to become the largest weighting in the MSCI Emerging Market Investable Market Index (EM IMI). This significant shift in the market landscape took place earlier this week, with India's weight in the Emerging Markets index edging closer to potentially becoming the largest.
The MSCI Emerging Markets Investable Market Index (EM IMI) is a comprehensive index that includes large, mid, and small-cap stocks from 24 emerging market countries. With a total of 3,355 constituents, this index broadly represents about 85% of the free float-adjusted market capitalization in each of the included countries. MSCI IMI consists of 3,355 stocks at preseny.
While the main MSCI EM index (standard index) covers the large and midcap space, the IMI includes a more comprehensive range, encompassing large, mid, and smallcap stocks. India’s heavier weight vis-à-vis China in MSCI IMI stems from the greater small-cap weighting in its basket.
After a reshuffle in MSCI indices last month, analysts projected that Indian equities could potentially attract inflows of approximately $4-4.5 billion.
The rebalancing reflects broader market trends. While Chinese markets have struggled on the back of economic headwinds in China, India’s markets have benefitted from favourable macroeconomic conditions.
In recent times, India has demonstrated a significantly stronger performance in the equity market. This can be attributed to the robust macroeconomic fundamentals of the Indian economy and the impressive performance of Indian corporations. Moreover, the growth in the Indian equity market has been widespread, evident in the large-cap, mid-cap, and small-cap indices.
Several key factors have contributed to this favorable trend. These include a noteworthy 47% rise in foreign direct investment (FDI) during the initial months of 2024, a decline in Brent crude prices, and substantial foreign portfolio investment (FPI) in the Indian debt markets.
Consequently, MSCI has been increasing relative weights of Indian stocks in its indices. This, apart from MSCI EM IMI, is evident from the rise in weight of India coupled with the relative decline in the weight of China in MSCI EM Index. Between March 24 and August 24, India’s weightage in MSCI EM went up from 18% to 20%, while the weight of China has declined from 25.1% to 24.5% over the same period.
In the CY 2024, the MSCI EM index has increased by 7%, while the Nifty has shown a stronger performance with a 15% return in USD terms. Conversely, Chinese equities have experienced a 10% rally.
Morgan Stanley analysts note that India’s growing share in global GDP and the global market is a positive long-term trend, provided corporate earnings remain strong. However, they also caution that a correction in the Indian stock market may be on the horizon, driven by investor concerns and market dynamics.
India continued to be highly favoured in emerging markets, as indicated by Morgan Stanley. The nation's strong economic fundamentals and increasing prominence in global indices contribute to its appeal for investors with a long-term perspective. Within the Asia-Pacific region, Morgan Stanley ranks India as its second choice following Japan, underscoring the country's significance within the investment landscape of the region.