India Eyeing MSCI EM Leadership To Strengthen Flows Amid Tailwinds

India has been gunning for China's leader position in MSCI's gauge for emerging markets. This race to the top can bring foreign inflows to the domestic market, despite premium valuations and heightened risk-off sentiment across the globe.

India's weightage in the EM gauge jumped to a record of 19.8% from 18.8% in May, while that of table topper China slipped to 24.2% from 24.7%, as per the index aggregator's quarterly review for August.

China's influence in emerging markets has declined since 2020, when it accounted for 40% of the MSCI EM Index, while India's presence has grown steadily, according to Bloomberg. Meanwhile, Taiwan is also another contender to replace China at the top of the index, buoyed by the country's surging semiconductor stocks.

India will keep seeing higher inflows despite uncertainties. The reason being earnings outlook and the growth prospects in India look very buoyant, according to Kranthi Bathini, director of equity strategy at WealthMills Securities Pvt. "There is a strong earnings visibility and the growth projections are strong in India."

But, global funds will remain cautious on the broader market and will most likely play selective stocks on Asia's fifth largest market, given the high valuations the scrips trade on, market watchers said. These flows will continue despite overseas investors being wary of global risk assets given the increasing political, financial and geopolitical risks.

India may continue to see selective stocks attracting FIIs' interest and a clear trend could only emerge after the US elections, according to Ajit Mishra, senior vice president of research at Religare Broking Ltd. "Besides, they are awaiting clarity over the interest rates trajectory, which is prompting them to maintain a cautious stance."

The MSCI Index—Morgan Stanley Capital International Index—is a benchmark for international investors, reflecting the performance of Indian companies. Foreign institutional investors are significantly influenced by this gauge when making decisions to allocate capital to domestic stocks.

In its latest review, the index aggregator made seven additions and one deletion from India in MSCI Emerging Markets Index. Rail Vikas Nigam Ltd., Zydus Lifesciences Ltd., Vodafone Idea Ltd., Oil India Ltd., Oracle Financial Services Ltd., Dixon Technologies India Ltd. and Prestige Estates Project Ltd. were added.

India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex—have risen 12% and 10.2%, respectively, so far this year, making them the sixth and seventh best performing Asian indices.

India Valuation Premium On Rise 

The ratio of 12-month forward price to earnings—overall value relative to its earnings—of India is at its highest to that of China, according to data complied by NDTV Profit. The gap between a four-year return (duration of a cycle) between India and China is at its highest ever.

Concerns of high valuation were also there a decade back, when China was growing at its peak. Despite that premium, the South Asian giant attracted high inflows, Bathini said. "The same case will apply to India." Growth always comes up with premium, he said. "Never in history, high growth never came at a low valuation and it always comes at a premium."

China's GDP growth matches India's over the pre-pandemic period with a rise in the domestic market, while Chinese equities have underperformed reflecting its weak economic growth.

Foreign institutions have been net buyers of Indian equities worth Rs 20,973 crore so far in 2024, according to data from the National Securities Depository Ltd., updated till the previous trading day. During the same period, they have racked up government bonds worth Rs 98,124 crore.

Despite increased volatility, the long-only inflows have been bullish while the short-term hot-money has been going out, Bathini said. "The legion of domestic investors are supporting the domestic markets."

(With inputs from Chinmay Vasdev).