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MSCI Emerging Markets

India has overtaken China in the MSCI Emerging Markets (EM) Investable Market Index (IMI) for the first time, making it the largest country by weight in the index. However, China remains the leader in the MSCI Emerging Market Standard Index.

The MSCI Emerging Markets Investable Market Index (IMI) includes large, mid-, and small-cap stocks from 24 emerging market countries. With 3,355 constituents, the index represents about 99% of the free float-adjusted market capitalization in each of these countries.

What’s in Today’s Article?

• Why India Continues to Be the Top Emerging Markets Growth Story for Investors
• Challenges Facing India
• Key Analysis of India Surpassing China

Why India Remains the Preferred Emerging Markets Growth Story for Investors:

• Background:
  • Over the past decade, India has transformed from being one of the “fragile 5” economies to becoming the world’s fifth-largest economy, thanks to sustained development efforts, structural reforms, and anti-corruption measures.
  • India’s stock market has surged by 46% in the last three years, significantly outperforming global equities, which gained 20%, and emerging market equities, which declined by 13%. Only the U.S. has shown comparable performance.
  • This remarkable growth has attracted global attention, leading some investors to wonder if they have missed out on the opportunity.
  • With headlines ranging from praising India as the next growth engine to expressing concerns about the rapid rise in the market, investors find it difficult to navigate these conflicting narratives.

What’s Driving the Indian Market?

• Labor:
  • India’s labour force presents promising opportunities for manufacturing growth.
  • According to Bloomberg, over 48 million medium-skilled workers, primarily in the manufacturing sector, are expected to retire from China and developed economies between 2020 and 2040.
  • Meanwhile, India is set to add over 38 million such workers.
• Capital:
  • With a wave of infrastructure projects underway and an anticipated investment of $1.7 trillion by 2030, India is well-positioned to benefit from these capital inflows.
  • This timing is particularly advantageous as global manufacturers seek to diversify their supply chains due to increasing geopolitical tensions, creating a significant growth opportunity for India.
• Economic Growth and Fiscal Prudence:
  • The government’s emphasis on high economic growth and increased infrastructure spending is helping India maintain a rapid development pace.
  • India’s commitment to reducing deficits, as highlighted in recent Budget statements, also enhances its attractiveness as an investment destination.
  • The country’s solid economic fundamentals and growing presence in global indices further attract long-term investors.
• Political Stability:
  • Political stability has been a crucial factor in driving India’s growth and boosting investor confidence in recent years.
• Benefiting from Global Sentiment Shifts:
  • India has somewhat benefited from global investors shifting their negative outlook away from China.

Challenges

• Productivity and Reforms:
  • While India’s favourable labour and capital conditions support growth, achieving sustainable progress requires productivity improvements through comprehensive reforms.
  • Key focus areas include enhancing education and skills training to facilitate workers’ transition from primary to secondary industries.
    • Over 40% of India’s workforce is still engaged in primary industries, nearly twice the proportion in China.
  • Improving urbanization (currently at 36% compared to China’s 64%) is necessary for more efficient relocation of rural workers.
  • Streamlining regulations and providing incentives for manufacturing have attracted business investment and should continue to foster growth.
• Inflation:
  • Rising inflation poses a short-term risk, potentially leading to tighter monetary policies, higher interest rates, declining asset prices, and currency depreciation in India.
• Geopolitical Tensions:
  • The Russia-Ukraine conflict and instability in the Middle East have caused challenges such as trade disruptions and migration issues.
• Global Warming and Climate Change:
  • These issues pose significant risks to agricultural productivity, biodiversity, and infrastructure, with potential implications for investments in India.

India Surpasses China – Key Insights

• Increased Global Investor Attention:
  • India’s growing weight in the MSCI EM index is attracting more attention from global investors, which is advantageous for the country.
  • As India surpasses China to become the largest component of the MSCI EM IMI index, it is set to draw more foreign portfolio investments.
• India as a Major Portfolio Component:
  • India is no longer a minor consideration in global portfolios; it has become a significant player that investors cannot overlook.
  • This shift means global funds may need to invest in Indian exchange-traded funds (ETFs) or directly in Indian stocks.
• Anticipated Increase in Foreign Participation:
  • Foreign investment in the Indian market is expected to rise in the coming months.
• Potential Cautionary Sign:
  • While a rising index weight is generally positive, it can sometimes indicate market exuberance that may lead to underperformance, as seen with China in the past.
  • Despite differences in India’s situation, historical patterns suggest a need for caution.
  • The increase in India’s index weight likely reflects robust fundamentals, including a larger free float and rising earnings, which are positive indicators.

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