India has overtaken China to become the top-weight nation in the MSCI Emerging Market (EM) Investable Market Index (IMI) for the first time. This marks a significant shift in the investment landscape, making India a more significant player in the global market.
Indian equities now hold a weighting of 22.27 percent of the index, surpassing Chinese stocks, which have dropped to a weighting of 21.58 percent, about 70 basis points lower. This is despite China’s market capitalization being $8.14 trillion, over 60 percent higher than India’s $5.03 trillion, according to Bloomberg data.
US brokerage Morgan Stanley points out that this change in weighting could attract more foreign investment into Indian firms. India’s new status as the top weight in the index might pull in additional foreign capital.
What’s the MSCI EM IMI?
The MSCI EM IMI, an offshoot of the main MSCI EM index, includes a broad range of stocks, covering large, mid, and small-cap companies. In contrast, the standard MSCI EM index only includes large and mid-cap stocks.
Sriram Velayudhan, senior vice-president at IIFL Securities, explains that India’s higher weight compared to China is due to the greater small-cap weighting in this EM basket.
Over the past couple of years, MSCI has been reducing the number of Chinese stocks in its indices following a period of underperformance in China’s markets. On the other hand, Indian equities have gained more prominence in these indices.
Recent Changes in the MSCI EM
Last week, MSCI added seven Indian stocks to its standard index while cutting 60 Chinese names. This move lowered China’s weighting in the EM index below 24 percent and raised India’s above 20 percent for the first time. Currently, China’s weighting in the MSCI EM index is 320 basis points more than India’s. However, the gap has significantly narrowed. At the start of 2021, China’s weighting was 38.7 percent, compared to India’s 9.2 percent.
Market Trends and Economic Dynamics
The changes in weighting reflect broader market trends. China has been facing economic challenges and regulatory crackdowns, while India has benefited from favorable macroeconomic conditions. MSCI’s methodology includes the availability of investment space for overseas funds. Since India has liberalized its foreign investment regulations, it has created more room for foreign portfolio investors (FPIs).
Even though India’s weighting in most MSCI indices has increased, many EM funds still underweight Indian equities. This is mainly due to concerns about their high valuations.
Heavyweights in the Index
Among Indian companies, Reliance Industries is the leader with a 1.22 percent weighting in the MSCI EM IMI. It’s followed by Infosys with 0.86 percent and ICICI Bank with 0.85 percent. Globally, Taiwan Semiconductor Manufacturing Company (TSMC) holds the top spot with an 8.09 percent weighting. Chinese tech giant Tencent comes in second at 3.6 percent, and South Korea’s Samsung is third with a 2.96 percent weighting.
In conclusion, India’s rise to the top weight in the MSCI Emerging Market Investable Market Index marks a significant milestone. This shift could bring in more foreign investment and further solidify India’s position in the global market. With favorable macroeconomic conditions and liberalized foreign investment regulations, India is poised for growth, even as China deals with economic and regulatory challenges. While Indian equities may still be viewed as highly valued, their enhanced weighting in the index reflects a stronger economic stance and promising future for the country’s market.
