India's weight in global MSCI indices expected to rise further in 2018

Strong market performance along with good IPO pipeline could help India improve its share

The weight of the Indian market in the global MSCI indices is expected to rise further in 2018, as the country continues to outperform its emerging market (EM) peers and its market capitalisation (market cap) is aided by a strong initial public offering (IPO) pipeline. 

Last year, India’s weight in the MSCI EM index went up by 47 basis points (bps) to 8.72 per cent, surpassing the previous high during the 2007 bull run. 
 

This increase in the weight would help domestic markets attract a greater share of the portfolio flows from foreign investors.

India, along with South Korea, finished as the best-performing major market in 2017. The benchmark Nifty 50 index rallied 28.6 per cent, while the S&P BSE Sensex was up 27.9 per cent during the last calendar year, amid good buying by portfolio investors (see chart).

Source: MSCI EM Index

Apart from the higher share prices, the country's market cap went up 43 per cent during 2017, aided by some large-sized IPOs such as General Insurance Company Re (GIC Re). Domestic firms raised more than Rs 650 billion through IPOs in the last calendar year. This buoyancy in primary market is expected to continue this year too, with a Rs 450-billion worth IPO pipeline. The year could also see lot of follow-on offerings from newly listed companies, bankers said.

“The pipeline is a lot busier this year going into next year than what it was a year ago. We should be beating the 2017 tally comfortably. Also, the trend of private equity monetisation seen in 2017 is going to continue in a big way,” said Anuj Kapoor, managing director, investment banking, UBS India.

The increase in the weight in any MSCI index would be of a great help to the country as the share of foreign portfolio investor (FPI) inflows would increase. All the global exchange-traded funds (ETFs) track indices such as MSCI EM for their asset allocation. On the other hand, actively managed funds mimic the MSCI indices, but make changes to the weights according to their investment strategy.

“India is our number one pick in the EM. It’s got a cyclical and structured recovery underway. I think next year (2018), the market will start to appreciate. Not only there is a growth upswing, but they are also going to realise this is not the old boom-bust cycle; this is more like a mature economy, which can actually deliver long-lasting growth,” said Robert Subbaraman, managing director, Nomura, in a recent interview to Business Standard.

In 2017, FPIs bought shares worth $8 billion from the Indian markets, second only to South Korea among EMs. Going by the optimism in the Indian markets, analysts expect the country's stature in the global markets to improve. In 2017, India crossed the milestone of $2-trillion market cap and became the eighth largest stock market in the world, overtaking Switzerland and Canada.

Despite this large size, its weight in the MSCI indices is very small. This is due to the smaller free-float market cap of the country. Free-float market cap excludes promoter holding and other stakes which are not freely available for trade. In a majority of the companies, promoters own more than half of the equity capital. Hence, the free-float in India’s market is relatively lower than the other EMs such as South Korea.

The MSCI reviews the index weights twice a year, once in May and then in November.