Morgan Stanley said India will soon overtake China to become the most influential country in a key emerging markets index, attracting more foreign funds and fuelling a rally in a stock market that is already among the best globally but is “only halfway through”.
After the August reshuffle, India’s weighting in the MSCI emerging markets index rose to 19.8%, equal to China’s 24.2%. India’s weighting has been steadily increasing from 9.2% in December 2020, while China’s weighting has declined from 39.1%.
“Increased weighting inevitably means more foreign inflows,” analysts led by Ridham Desai said in a note on Wednesday.
“In the context of India being underweight in the average emerging markets portfolio, this is even better for foreign portfolio flows.”
Foreign portfolio investors (FPIs) have bought Rs 531.78 billion ($6.33 billion) worth of stocks due in 2024 so far, and they have remained net buyers since June, driven by policy continuity after the country’s elections and the imminent start of global interest rate cuts.
So far, sustained inflows from domestic institutional investors, mutual funds and retail traders have helped push the benchmark Nifty 50 to record highs. Its 16% surge this year is higher than most other markets, including China.
Mr Desai expects this momentum to continue as fiscal consolidation will help private borrowing and spending drive the next leg of income growth and higher FII inflows will keep liquidity in surplus, providing flexibility in lending.
“We believe we are only halfway through the current bull market. The bull market peak for India is likely still in the future and the weightings in EM indices may have some more distance to cover before reaching the peak.”
Morgan Stanley has maintained that India is its top pick in emerging markets and second pick in the Indo-Pacific region after Japan.
In stocks, it prefers cyclical stocks over defensive stocks, and large stocks over small stocks. And in sectors, it is ‘overweight’ on financials, technology, consumer discretionary and industrials, and ‘underweight’ on others. ($1 = 83.9690 Indian rupees)
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