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India is on the verge of overtaking China as the most influential nation within the MSCI Emerging Markets Index, according to a recent report by Morgan Stanley. This shift is expected to attract significant foreign investments and further fuel the already robust Indian stock market rally. The report emphasizes that this rally is far from reaching its peak and has potentially only reached its halfway point.
India's rising weight in the MSCI index, which now stands at 19.8%, is a direct result of the August rejig. This weight has been steadily increasing since December 2020, when it was only 9.2%, while China's weight has concurrently declined from 39.1% to 24.2%. Morgan Stanley analysts attribute this increased weight to a surge in foreign portfolio flows, especially considering that India has historically been underweight in average emerging market portfolios.
The influx of foreign investment is evident in the record-breaking 531.78 billion rupees ($6.33 billion) worth of shares purchased by foreign portfolio investors (FPIs) in 2024. This positive trend has persisted since June, bolstered by the continuity of policy after India's elections and the imminent start of global interest rate cuts. While the Nifty 50 index has reached new highs due to sustained inflows from domestic institutional investors, mutual funds, and retail traders, the anticipated further influx of foreign funds is expected to contribute to its resilience and continued growth.
Morgan Stanley analysts anticipate that the stock market rally will continue, fueled by fiscal consolidation. This consolidation is expected to encourage private borrowing and spending, leading to further earnings growth. The additional liquidity provided by the increased FII inflows is expected to provide further resilience to the market. Analysts predict that the current bull market has only reached its halfway point, with the potential for the market to reach its peak in the future. The increasing weight of India in the EM index, therefore, is likely to continue to rise before peaking.
In line with this optimistic outlook, Morgan Stanley maintains its stance of India being its top pick amongst emerging markets. Within the Indo-Pacific region, India is ranked as the second favorite, behind Japan. The report suggests focusing on cyclical stocks over defensive stocks and large-cap companies over small-cap companies. In terms of sectors, financials, technology, consumer discretionary, and industrials are deemed 'overweight', while other sectors are classified as 'underweight'.
The report from Morgan Stanley highlights a positive outlook for the Indian stock market, driven by the increasing weight of India in the MSCI EM index, the anticipated influx of foreign investments, and the ongoing domestic economic growth. The report encourages investors to consider cyclical and large-cap stocks across select sectors, positioning India as a key player in the global emerging market landscape.
Source: India To Soon Top China Among Emerging Global Markets: Morgan Stanley