India Surpasses China in MSCI EM Index: France Could Be Next

India has officially overtaken China in the MSCI Emerging Markets Index, according to a note by Morgan Stanley on September 17. This development is expected to attract significant foreign investment into India. The weightage difference between India and China in the benchmark index has been narrowing since 2020, and India has been anticipating this moment for quite some time.

China’s Declining Weightage Since 2021

Morgan Stanley’s note highlighted that according to the MSCI Investable Market Index (IMI), which includes large, mid, and small-cap stocks, India is now the largest EM market. Meanwhile, China’s weightage has been steadily declining after peaking in 2021.

The brokerage firm also pointed out that India is now the sixth-largest emerging market globally, trailing slightly behind France. India’s weightage in the MSCI EM Index stands at 2.35, just below France’s 2.38.

India’s Growing Share and Economic Growth

Morgan Stanley expects India’s share in the index to continue rising, driven by strong market performance, new equity issuances, and improved liquidity. The firm remains “overweight” on India and “underweight” on China in its pan-Asia EM asset allocation strategy. India’s nominal GDP growth rate is currently over three times higher than China’s, further boosting its market position.

Timing and the Federal Reserve’s Role

India’s ascent comes at a crucial time when there are expectations that the U.S. Federal Reserve may cut interest rates. A rate cut could drive inflows into emerging markets, with India being a primary beneficiary.

China’s dominance in emerging markets has been declining since 2020 when it accounted for 40% of the MSCI EM Index. On the other hand, India’s presence has been rising sharply. In May, India’s weightage in the EM Index increased from 18.8% to a record 19.4%, while China’s weightage fell from 25.4% to 24.2%.

Impact on Foreign Investors

At the beginning of this month, India surpassed China to become the country with the highest weightage in the MSCI EM Investable Market Index. The MSCI Index serves as a benchmark for international investors, reflecting company performance and influencing Foreign Institutional Investors (FIIs).

The valuation of domestic stocks could impact investor sentiment. India remains a more expensive market compared to its rivals. The broader market in India trades at higher valuations than its benchmark index. For example, the Nifty 50’s price-to-earnings (P/E) ratio stands at 24.4, while the small-cap and mid-cap indices have P/E ratios of 34.5 and 46.8, respectively.

Conclusion

India’s surpassing of China in the MSCI Emerging Markets Index marks a significant milestone, signaling stronger market performance and attracting more foreign investments. As India’s economy continues to grow rapidly, its influence in global markets will likely increase, potentially positioning it to overtake France in the near future.