India’s weighting on the MSCI emerging markets (EM) index is tipped to rise to 16.3% from the current 15.88% with nine fresh stock inclusions in the gauge. The addition, effective November 30, will take India’s representation to an all-time high of 131 shares. Mint explains:
Why is the MSCI index important?
MSCI is a stand-alone NYSE-listed global index whose stock indices are widely tracked by global investment managers, hedge funds, banks, companies and insurance companies to allocate funds across global stock markets. The indexes are widely used for passive investment through exchange-traded funds, index funds and some fund. Passive funds return mirror index returns unlike active funds, which can beat or underperform benchmarks. Some of the most widely tracked of its several indices are the All Country World Index, the Frontier Markets Index and the EM Index, launched in 1988, with India included in 1994.
How did India fare on the EM index?
India has grown over the years and its weight will double to 16.3% from four years ago once the latest regime takes effect. It is second only to China, whose weight until the end of October was 29.89%. India leads Taiwan (15.07%), South Korea (11.78%) and Brazil (5.42%). As a stand-alone country, India outperformed the benchmark EM index in terms of generating net returns of 4.75% in the year to 31 October against a negative 2.14% return by MSCI EM. The longer-term performance is even more impressive, with net returns of 8.33% annualized over 10 years versus just 1.19% annualized MSCI EM returns.
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How do stocks find a place in the index?
The share weights on an EM index are based on free market capitalization, or the shares available for buying and selling by foreign investors. The higher the market capitalization, the higher the weight and the allocation of investors. Reliance Industries (weight 1.34%), ICICI Bank (0.91%) and Infosys (0.87%) are among the top 10 stocks on MSCI EM.
How will increased representation help?
Passive foreign trackers will put $1.5 billion into the nine Indian stocks in the index and other Indian counters whose weights will increase. MSCI increased the weightings of Zomato, Hindustan Aeronautics and Jio Financial Services, to name a few, which will receive an estimated $160 million in passive inflows. The rebalancing means heavyweights like Reliance will see small weight cuts, according to brokerage Nuvama, which estimates outflows of $645 million from the top five counters.
Will total FPI investment rise?
The increase will see inflows from passive trackers and not necessarily active fund managers. So, it does not mean that overall foreign cash flows will rise. Sure, it’s a mood booster. Over longer periods, passive investments tend to generate higher returns due to lower expenses and absence of human error. MSCI EM’s latest positive revision comes almost a month after foreign brokerage Morgan Stanley upgraded India to most preferred emerging market status.
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