Mumbai September 6 2024: India’s stock market rally is ramping up its index weighting and creating a dilemma for global fund managers: sit back and watch as their relative exposure shrinks while the market grows, or buy in at increasingly eye-watering prices.
Most find the latter uncomfortably risky and are seeking alternatives, some driving money into India’s smaller companies, while others are looking elsewhere at other emerging markets.
The trend has been driven by years of strong earnings in India at the same time as China’s markets have stumbled, upending their weightings in the MSCI Emerging Markets’ Index (.MSCIEF) which serves as a benchmark for global EM funds.
India’s MSCI EM weight has shot to 19%, up from just 8% four years ago and analysts at Nuvama Alternative & Quantitative Research expect it to top 22% by the end of this year. China’s weighting over the same period has collapsed from 40% to 25%, data from MSCI shows.
“The convergence between India and China is causing problems for a lot of portfolio managers because if you had a global mandate or a pan-Asia mandate, you probably were at best equal weight India and probably underweight,” said Vikas Pershad, portfolio manager for Asian equities at M&G Investments.
“And that underweight is growing.”
Part of the reason for the long-term underweight has been that many investors preferred China’s cheaper and dynamic market, while entry and exit costs for funds can be high in India.
Managers would need to buy Indian companies at a rapid clip to keep up with their increasing presence in indexes, which with an average 12-month price-to-earnings ratio of 24 times for big and middle-sized firms are the most expensive in major markets, according to LSEG data.
Many are choosing not to do so, leaving India the biggest underweight allocation among emerging market funds, according to HSBC and Copley Fund Research.
