The MSCI Emerging Market (EM) Investable Market Index (IMI) now lists India as the top weight country for the first time, surpassing China in the process.
The combined weight of Indian stocks in the index is 22.27 percent, somewhat more than that of Chinese stocks, whose combined weight has now dropped to 21.58 percent.
This change occurs even though, according to Bloomberg data, China’s market capitalisation of $8.14 trillion is more than 60% larger than India’s $5.03 trillion.
India’s ranking as the top weight in the index is likely to draw more foreign capital into Indian firms, according to US broking Morgan Stanley, even though the assets tracking the MSCI EM IMI—a spinoff of the main MSCI EM index that is followed by funds managing roughly $500 billion in assets—are unknown.
The IMI includes a wider selection of large, mid, and smallcap equities, whereas the main MSCI EM index (standard index) focusses on the large and midcap space.
According to Sriram Velayudhan, senior vice-president at IIFL Securities, the larger smallcap weighting in this EM basket accounts for India’s increased weight relative to China.
After a prolonged run of underperformance, the global index provider MSCI has been removing Chinese companies from its indices during the last two years. In the meantime, Indian stocks have become more and more prominent in MSCI indices.
China’s weighting in the EM index dropped below 24% last week, while India’s weighting surpassed 20% for the first time. MSCI made these changes while also adding seven Indian equities to its standard index and eliminating 60 Chinese names.
China currently has 320 basis points more weighting in the MSCI EM index than India does. But this difference has shrunk significantly. China’s 38.7% weighting at the start of 2021 was significantly higher than India’s 9.2%.
Broader market dynamics are reflected in the rebalance. China has faced economic challenges and regulatory measures, whilst India’s markets have benefited from advantageous macroeconomic circumstances.
The availability of investment capacity for foreign funds is taken into account in MSCI’s methodology since global funds that want to get exposure to Asian or emerging markets watch its indices. Foreign portfolio investors (FPIs) now have more freedom to manoeuvre thanks to India’s relaxation of the regulations governing foreign investments.
Many EM funds continue to be underweight on Indian equities despite the country’s growing weighting in most MSCI indices. This is mostly because of worries over the country’s comparatively high valuations.
In the MSCI EM IMI, Reliance Industries is weighed at 1.22 percent among Indian businesses, with Infosys at 0.86 percent and ICICI Bank at 0.85 percent. More broadly, the top three components of the index are South Korean electronics giant Samsung at 2.96 percent, Chinese technology conglomerate Tencent at 3.6%, and Taiwan Semiconductor Manufacturing Company (TSMC), with a weighted of 8.09 percent.