Indian stock market to see record inflows as India-China weight gap in MSCI Index narrows to historic low

On Tuesday, global index provider MSCI, in its February quarterly review, announced the inclusion of five Indian stocks in the MSCI Global Standard Index. These stocks are estimated to see approximately $816 million in inflows upon the adjustments.

The index provider has also increased the weights of 12 stocks and reduced the weightage of 2 stocks from the index. Moreover, MSCI added 27 stocks and removed six stocks from the Small Cap index.

Read here: MSCI Rejig: PNB, BHEL, NMDC, among five additions to India Standard Index; 27 stocks added to Small Cap index

Overall, Nuvama Alternative & Quantitative Research expects India to witness upwards of $1.2 billion FII passive inflow after these adjustments, which will take place on February 29.

Currently, India holds approximately 17.9% representation in the MSCI Emerging Market Index. Following the February rejig, the weight will increase to over 18.2%, marking a historic high.

Meanwhile, China’s weight in the index has declined to 25.4% now. The gap in weightage between Indian and Chinese equities on the MSCI index will be the shortest-ever and analysts expect this gap to narrow down further.

“Estimates suggest India could see $20-30 billion in additional inflows due to the increased weightage, based on calculations considering passive funds that track the MSCI index and their typical rebalancing practices. Fund managers may also be attracted to India’s growth potential, further increasing inflows,” said Atul Parakh – CEO of Bigul, the digital arm of Bonanza Portfolio Ltd.

The change signifies India’s growing importance in the global investment landscape and investor confidence in India’s long-term economic growth potential, he added.

Also Read: MSCI deletions reflect falling confidence in China stocks

In 2023, India’s stock count in the MSCI Standard index has risen to 131, with the inclusion of a net of 17 Indian stocks over the past four reviews. This marks an improvement from 2022, where only a net of 9 Indian stocks were included. 

The notable factors contributing to this increase in 2023 include India’s substantial rally compared to other Emerging Markets and MSCI’s shift from semi-annual to quarterly rebalancing for stock inclusions/exclusions. 

“With a consistent flow from DII and now if steady FII participation resumes, there is potential for India to surpass a 20% weight in the MSCI EM Index by early 2024 itself,” said Abhilash Pagaria of Nuvama Alternative & Quantitative Research.

Meanwhile, inflows into India may also accelerate as global investors seem to ditch China and prefer Dalal Street stocks.

The Chinese stock market has underperformed severely, particularly over the past three years. Through Q1CY24, China’s real estate and banking industries may continue to reverberate throughout the economy, counterbalancing the moderate expansion observed in numerous consumer sectors. 

“The lowest daily average turnover on the stock market since 2019 was 790 billion yuan in 2023, and leading emerging markets (EM) funds are still avoiding the Chinese stock market. If significant EM funds continue to pull out, China’s equity risk could prolong stagnation. Top EM funds’ average holdings of Chinese stocks have fallen to a five-year low, and very few have increased their positions,” said Alok Agarwal, Head Quant & Portfolio Manager, Alchemy Capital Management.

Also Read: Can India benefit from Chinese stock market crisis? Experts weigh in

In the MSCI Emerging Markets Index, India has the second-largest country weight (18%), behind China (23%). India’s weight was 8% five years ago, while China’s was 31%.

“With the outlook continuing to be strong for India, we expect India to attract more money on its own merits, but China’s failures would only add fuel to the fire,” said Agarwal.

On the other hand, Parakh believes while increased inflows could positively influence prices, a correction is also possible if earnings growth doesn’t keep pace, highlighting the need for selective investing and focusing on companies with strong fundamentals. 

He expects sectors benefiting from strong domestic demand and government initiatives, such as infrastructure, consumer staples, healthcare, and a few IT companies, will continue to remain attractive.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 14 Feb 2024, 02:26 PM IST