India’s Ascendancy in Emerging Market Stocks May Surpass China’s
India is poised to close the gap with China in the MSCI Inc. index for developing nations. Industry experts project that India’s weight in the MSCI Emerging Markets Index will increase by at least one percentage point, potentially placing it nearly on par with China’s current 22.33 percent benchmark, as India falls slightly behind at 19.99 percent.
The expected higher weighting for India has the potential to position it as the new anchor for emerging market equities, potentially driving increased investment flows into the country. Fund managers note that India’s rising influence may make the EM gauge more appealing to global investors who have been wary about China’s dominant position in the index.
However, this transition may have unintended implications, including compelling index followers to allocate funds to India’s already expensive stocks at a time when crowded trades are experiencing a downturn due to global market volatility.
India’s growing prominence in emerging markets is attributed to its robust economic growth, expanding middle class, and thriving manufacturing sector, making it an attractive investment destination. In contrast, China is facing long-term economic challenges and strained relations with the West.
The gradual decline in China’s standing in emerging markets and the steady expansion of India’s influence indicate a shift in the global investment landscape. China’s weight in the MSCI EM Index peaked at 40 percent in 2020 but has since decreased due to regulatory crackdowns and efforts to deleverage its indebted property sector.
Additionally, Taiwan is emerging as another contender to replace China’s leading position in emerging market equity portfolios, accounting for 18.39 percent of MSCI’s EM index as of July.
India’s impending rise in the MSCI Emerging Markets Index is further supported by an increase in free float for companies, a rise in equity market value, and the introduction of new large listings. With the prospect of the gap in weightings between India and China continuing to narrow, India’s weight was just 2.34 percentage points away from China’s in the MSCI Asia Pacific Index, indicating a recurring pattern across major index providers.
In the upcoming review, MSCI is expected to include six stocks in its key India index, such as Samsung Electronics Co. supplier Dixon Technologies (India) Ltd. and property developer Oberoi Realty Ltd. Additionally, HDFC Bank Ltd., India’s largest by market value, is projected to see a gradual increase in its weighting.
While Chinese stocks are facing challenges, India’s NSE Nifty 50 Index has surged by 12 percent this year, following Prime Minister Narendra Modi’s re-election for a third consecutive term, setting the benchmark for a ninth consecutive year of annual gains.
This divergence underscores investors’ growing preference for India, despite China’s lower equity valuation. It also highlights China’s struggle to halt the downward trend in its markets.
In conclusion, India’s potential to surpass China’s influence in the MSCI Emerging Markets Index signals a significant shift in the global investment landscape, positioning India as an increasingly attractive destination for investors seeking exposure to emerging market equities.
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