India's increased weightage on MSCI EM index yet to yield results

The increasing weightage in recent times of India in the MSCI Emerging Markets (EM) Index has not translated 

into additional flow of foreign money.

Foreign funds have been net sellers by little over Rs 29.61 billion (little over $0.4 billion at the current exchange rate) this year, though this is still better than many other EMs.

Currently, global exchange traded funds (ETFs) are on a selling spree across developing markets, with redemption and currency concerns. Falling EM currencies are a headwind for foreign investors.

Actively managed funds have also been bearish on India. Foreign portfolio investors' (FPIs') overweight position on India is at its lowest since 2011, according to a report this week from brokerage Morgan Stanley India, authored by Ridham Desai and Sheela Rathi. These funds constitute a large portion of foreign portfolio inflow into India. While ETFs simply follow the weights assigned by index providers, the actively-managed funds use their discretion.

These two factors have resulted in limited flows, despite the gains in the MSCI EM index. “India’s gain in the index is on account of market out-performance and increasing free-float market cap as promoter holding in several companies is coming down. However, in the current global scenario, the increased weight might not lead to any improvement in the flows, as global ETFs are pulling out of EMs on account of factors such as trade tensions and currency concerns. The increased weight will help India in the long run, attracting more capital after the global scenario improves,” said U R Bhat, managing director, Dalton Capital Advisors.

MSCI is the largest index provider globally; scores of ETFs track its indices. According to its data, ETFs worth $2 trillion track the EM index. India’s weight increased by 22 basis points to 8.99 per cent in July 2018, compared to 8.77 per cent in November 2017. FPI sales in India have been under half-a-billion but other emerging markets have seen more severe outflows.

Dilip Bhat, joint managing director at brokerage Prabhudas Lilladher, says flows from passively managed money, such as the capital coming in through ETFs, largely look to broad economic indicators for cues, which may explain recent trends. “The ETF money was on macro factors,” he said.

Improving corporate performance might help in greater overall flows in the days ahead, according to him.

The multi-year low allocations could also be reason for more capital to come in as the market outperforms, according to the Morgan Stanley study. “India has been remarkably resilient in the recent EM turmoil, driven by macro stability, low policy uncertainty, improving growth and domestic flows. India’s policy environment has defied expectations and remained relatively benign, despite the coming elections in 2019,” it has said.

Rising weight, limited flows

• India's weight in MSCI EM Index has been rising
• Flows have been tepid in recent times
• This is because emerging market ETFs have seen exits
• Actively managed funds, too, have been underweight on India
• Improving corporate performance and market gains may reverse the trend