India has surpassed China to become the top weight nation in the MSCI Emerging Market (EM) Investable Market Index (IMI) for the first time.
Indian equities together carry a weighting of 22.27 per cent in the index, edging ahead of Chinese stocks, whose combined weight now has fallen to 21.58 per cent.
This shift comes despite China’s market capitalisation of $8.14 trillion being over 60 per cent greater than India’s $5.03 trillion, according to Bloomberg data.
Though assets tracking the MSCI EM IMI, an offshoot of the main MSCI EM index followed by funds managing approximately $500 billion in assets, are not known, US brokerage Morgan Stanley highlighted that India’s position as the top weight in the index is likely to attract additional foreign capital into Indian firms.
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 stems from the greater smallcap weighting in this EM basket, according to Sriram Velayudhan, senior vice-president at IIFL Securities.
Over the past two years, MSCI, the global index provider, has been trimming Chinese stocks off its indices following a protracted period of underperformance. Meanwhile, Indian equities in MSCI indices have been rising in prominence.
Last week, MSCI added seven Indian stocks to its standard index while cutting 60 Chinese names, driving China’s weighting in the EM index below 24 per cent and pushing that of India above 20 per cent for the first time.
At present, China’s weighting in the MSCI EM index exceeds India’s by 320 basis points. However, this gap has narrowed dramatically. At the beginning of 2021, China’s 38.7 per cent weighting was much greater than India’s 9.2 per cent.
The rebalancing reflects broader market trends. While China has struggled with economic headwinds and regulatory crackdowns, India’s markets have benefitted from favourable macroeconomic conditions.
MSCI’s methodology incorporates the availability of investment legroom for overseas funds as its indices are tracked by global funds seeking exposure to emerging markets or Asian markets. India’s liberalisation of foreign investment regulations has expanded the room available to foreign portfolio investors (FPIs).
Despite India’s increased weighting in most MSCI indices, many EM funds remain underweight on Indian equities, largely due to concerns about their relatively high valuations.
Among Indian companies, Reliance Industries holds a 1.22 per cent weighting in the MSCI EM IMI, followed by Infosys at 0.86 per cent and ICICI Bank at 0.85 per cent. On a broader scale, Taiwan Semiconductor Manufacturing Company (TSMC), with an 8.09 per cent weighting, Chinese technology conglomerate Tencent at 3.6 per cent, and South Korean electronics giant Samsung at 2.96 per cent are the top three constituents of the index.
