On the wane: Over $1 trillion rout trims India's weight in EM gauges

Country slips to third position on MSCI Emerging Market indices

India’s influence in the widely followed MSCI Emerging Market (EM) indices is diminishing, with its market capitalisation shrinking by more than $1 trillion since its peak in September last year.

 

The country’s weighting has dropped by more than 200 basis points (bps) to below 20 per cent in the MSCI EM, and its spinoff MSCI EM Investable Market Index (IMI), which are tracked by passive funds with assets worth more than $500 billion.

 

In the flagship MSCI EM index, the cumulative weighting of Indian companies stood at 18.41 per cent in January, down from 20.8 per cent in September last year.

 

Similarly, in the MSCI EM IMI index, the weighting has fallen to 19.7 per cent from 22.3 per cent.

 

India reached the pole position in the IMI index in August last year, overtaking China, the world’s second-largest market and 2.5 times the size of India. However, India’s ranking has now slipped to the third spot on both the indices, behind China and Taiwan.

 

This shift is largely due to a sharp rally in the Chinese equities, fuelled by aggressive stimulus measures. China’s weighting has surged by over 300 bps to touch 27.5 per cent in the MSCI EM index and 25 per cent in the MSCI EM IMI index.

 

India’s weighting has continued to decline in recent weeks as stock prices have extended their downward spiral this month.

 

A lower weighting in the MSCI global indices means a reduced share of global investment flows for India. For instance, if an investor allocates $100 to the EM basket, India will now receive $18.4, compared to $21 in September. 

 

The weighting in global indices are determined by the free float—or investable—market capitalisation. India’s overall market capitalisation has dropped by over $1 trillion from its peak in September to $4.6 trillion, marking one of the biggest wipeouts in absolute terms.

 

The sharp correction in domestic equities follows a $20 billion pullout by foreign portfolio investors (FPIs) since October.

 

“How quickly market sentiment can change,” said Herald Van Der Linde, head of equity strategy, Asia Pacific at HSBC.

 

“In India, the main attraction was very high earnings growth, which has now come under question. There's now a feeling that we need to have lower multiples for this market. At the same time, US bond yields started moving higher, causing FPIs to take money out of emerging markets in general. This added to the malaise in Indian equities. Additionally, China started to perform very well. From an FPI standpoint, you sell the market that is easy to sell, and India is one of them,” he added.

 

On one hand, India’s weighting has declined from its peak in global indices. At the same time, the majority of global equity strategists run an underweight position in India compared to its weighting in the MSCI EM or Asia Pacific index, exacerbating the situation.

 

A note by Macquarie earlier this month underscored the sharp selloff in emerging markets (EMs) amid a strong appreciation in the US dollar.

 

"January has seen significant outflows across EM ex-China ($13 billion), with especially strong net outflows from India ($8 billion) and, to a lesser extent, Korea, Taiwan, Malaysia, and South Africa," said Viktor Shvets, global strategist at Macquarie Capital, adding that EMs will continue to be whiplashed by global forces outside their control.

 

Sriram Velayudhan, senior vice-president, IIFL Capital reckoned that India’s standing in the EM index could improve.

 

“India’s rank in the MSCI EM basket has slipped lately owing to its price performance. However, when things improve, regaining its rank should not be an issue for India. Moreover, there are many newly listed large companies waiting to enter the MSCI Standard Index, which will add to India’s weighting in the coming months,” he added.