India’s emerging markets weightage tops 2007 bull run

November 22
20:26 2017

The relative outperformance of Indian share markets has helped the country improve its weightage in the MSCI emerging markets (EM) index.

According to data compiled from the MSCI website, India now has 8.72 per cent of the MSCI EM index, 50 basis points (bps) higher than the country’s weight during the 2007 bull market. Even on a year-on-year basis, the weight has gone up by 47 bps.

This will help attract more of foreign flows, since at least $ 1.5 trillion of funds are estimated to track this index. Passive funds allot capital in line with the weight in the index; active ones slightly alter these, depending on their view on each nation. For instance, Swiss finance multinational UBS’ EM strategy is to go overweight on India and South Korea, while underweight on Taiwan and Thailand.

In weightage, India is the fourth largest EM, after China, Korea and Taiwan. Although India is much bigger than Korea or Taiwan in market capitalisation (m-cap), both these countries have much higher weightage in the MSCI EM index. This is due to the relatively lower free-float m-cap of Indian markets. While calculating the weight, MSCI takes into consideration the free-float, rather than the complete m-cap; the former is the proportion of shares readily available for trade, after excluding promoter holdings and locked-in shares. The free-float m-cap of BSE 500 companies is around 46 per cent.

UBS says it is overweight on India despite high valuations, as the latter are supported by factors such as “Gross Domestic Product growth, reforms, a strong central bank and amore stable rupee”.

The increase is India’s weightage in the past year is attributed to the sharp rally in share prices of several large-cap stocks, including those of HDFC Bank, HDFC, Reliance Industries and ITC. These stocks are not only significant in terms of m-cap; they also have significantly higher of free-float. A flurry of Initial Public Offers pf equity (IPOs) has also helped; the year has seen listing worth close to Rs 60,000 crore, the highest ever.

“It has been a great year for blue-chip stocks, with some of the heavyweights outperforming the markets in a big way. Indian markets are uniquely placed compared to other EMs, thanks to the macro economic stability and growth potential. The only drag, domestically, has been corporate earnings. Once the earnings pick up, India will do much better than EM peers,” said G Chokkalingam, founder, Equinomics Research & Advisory.

No domestically-based company is in the top 10 stocks by weightage in the MSCI EM index. Chinese information technology (IT) firm Tencent Holdings is the largest by weight, followed by Korean electronics giant Samsung.

China’s weightage in the index has more than doubled since 2008. With 29.7 per cent, China is now the biggest in the index. Brazil and Russia have seen their weight in the index go down.

In terms of sectoral weightage, IT has dethroned financials since 2008 to become the most important sector, 28.5 per cent against 10.1 per cent in 2008. That of financials has risen marginally to 23 per cent, from 22.4 per cent since 2008.

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