India could soon overtake China among emerging markets index, says Morgan Stanley

Sept. 5, 2024, 8:56 a.m.

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India could soon overtake China as the most influential in a key emerging markets index, pulling in more foreign funds and adding fuel to a stock market rally that, though already among the best globally, is “only past the halfway mark”, Morgan Stanley said.

The South Asian country’s weightage in the MSCI emerging markets index rose to 19.8 per cent after a rejig in August, closing in on China’s 24.2 per cent. India’s weightage has steadily increased from 9.2 per cent in December 2020, while China’s has dropped from 39.1 per cent.

Advertisement “A rising weight essentially means more absolute foreign flows,” analysts led by Ridham Desai said in a note on Wednesday.

“In the context of India being underweight in the average emerging markets portfolio, this is even better for foreign portfolio flows.”

Foreign portfolio investors (FPIs) have bought shares worth 531.78 billion rupees ($6.33 billion) so far in 2024, and have remained net buyers since June, bolstered by policy continuity after the country’s elections and an imminent start to global interest rate cuts.

Sustained inflows from domestic institutional investors, mutual funds, and retail traders have been instrumental in propelling the benchmark Nifty 50 index to record highs. Its 16% surge this year surpasses the gains of most other markets, including China.

Desai anticipates the market rally to continue as fiscal consolidation empowers private borrowing and spending, driving the next phase of earnings growth. Furthermore, increased foreign institutional investor (FII) inflows will maintain ample liquidity, enhancing market resilience.

“We think we are only past the halfway mark in the current bull market. A bull market peak for India is possibly still in the future and the weight in the EM index could have some more distance to travel before it peaks.”

Morgan Stanley maintained its top ranking for India among emerging markets and its second-favorite position, trailing only Japan, in the Asia-Pacific region.

Among stocks, it prefers cyclicals over defensives and large-caps over small-caps. And among sectors, it is ‘overweight’ on financials, technology, consumer discretionary and industrials, and is ‘underweight’ on others.

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