India Surpasses Taiwan In MSCI EM Index, Emerging As Top Investment Choice

India has surpassed Taiwan in the MSCI Emerging Markets (EM) index, securing the second position after China. This shift solidifies India’s status as a promising investment destination within the emerging markets, with its MSCI EM index spiking to 17. 1 per cent, a remarkable leap from 7 per cent in the past eight years.

Recent reports suggest that India is well on track to further increase its weight in the MSCI EM index, potentially exceeding 20 per cent by early 2024. Ongoing domestic institutional investments and anticipated steady participation from Foreign Institutional Investors (FII) are cited as key factors contributing to this growth, as indicated in a recent Nuvama report. Jefferies notes underscore India’s attractiveness to foreign investments in the medium term, projecting a positive outlook for 2024.

The country’s positioning in EM portfolios, while currently relatively light, is gaining relevance due to its expanding size. Favourable conditions, including expected political stability, a burgeoning investment cycle, and a peaking US dollar, create an ideal environment for increased foreign flows into Indian markets. After experiencing a significant outflow of $33 billion from the second half of 2021 to the first half of 2022, Foreign Portfolio Investment (FPI) flows have reversed, witnessing the highest inflows in the last 11 years.

India’s growing weight in EMs is identified as a contributing factor, with its neutral weight in the benchmark MSCI EM rising by 3. 5 percentage points over the past six quarters. Analysts at Jefferies highlight the potential for Foreign Portfolio Investors (FPIs) to take a larger position as a crucial driver for future flows.

While India’s relative position in large EM active funds is now closer to neutral, the prospect of FPIs increasing their position could play a pivotal role in shaping future trends, according to Jefferies. India’s MSCI EM pack share, steady at 8 per cent until October 2020, has nearly doubled since then. This surge is attributed to factors such as the introduction of a standardised Foreign Ownership Limit (FOL) in 2020, robust performance in Indian equities (particularly in the Midcap segment), and weaker performance in other emerging markets, notably China.

By 2023, India’s stock count in the MSCI Standard index increased to 131, with a net addition of 17 Indian stocks across four reviews. This improvement from 2022, where only nine Indian stocks were included, is attributed to India’s substantial market rally compared to other emerging markets and MSCI’s transition from semi-annual to quarterly rebalancing. China’s weight in the MSCI EM index has decreased to 26.

6 per cent from 33. 5 per cent a year ago, while Taiwan, South Korea, and Brazil have seen marginal increases since last year. Client Associates (CA), India’s largest multi-family office, advocates for increased India representation in both the MSCI Emerging Market Index (MSCI EM) and the MSCI All Countries World Index (MSCI ACWI).

A white paper by CA emphasises India’s robust economic growth, poised to become the world’s third-largest economy by the end of the decade. The paper urges a reassessment of India’s allocation in global indices, citing the disparity between its potential and current MSCI representation. Highlighting India’s market capitalisation/GDP contrasted with MSCI EM and MSCI ACWI allocation, the paper underscores India’s potential for diversification and better risk-adjusted returns.

It identifies high promoter ownership limiting foreign investment in large firms and India’s insufficient market accessibility as key reasons for its under-representation in MSCI indices. .