India overtakes China to become largest market in MSCI Index

India has reached a significant milestone by overtaking China to become the largest market in the MSCI Emerging Markets (EM) Investable Market Index (IMI). As of the end of August, India now leads among emerging markets, signalling a noteworthy shift in global economic power dynamics.

What is MSCI Index?

The MSCI Indexes serve as benchmarks for measuring stock market performance in specific regions. MSCI selects stocks for its equity indexes based on criteria such as liquidity and tradability, ensuring that only those with active investor participation and no ownership restrictions are included. This careful selection process is essential for accurately reflecting the market dynamics of various geographic areas.

MSCI strives to maintain a balance between accuracy and efficiency in its indexes. Each index must contain a sufficient number of stocks to effectively represent the underlying equity market while avoiding an overload of stocks that could hinder the ability of ETFs and mutual funds to replicate the index's performance. This dual focus on representation and practicality is crucial for investors looking to track market trends.

Each MSCI Index calculates its total value by summing the market capitalizations of all included stocks. Market capitalization is determined by multiplying the stock price by the number of outstanding shares. This methodology is similar to that of the S&P 500, while the Dow Jones Industrial Average follows a different approach. Furthermore, MSCI calculates market caps in both U.S. dollars and local currencies, providing insights into index performance without the influence of exchange rates.

MSCI offers a wide range of indexes that cover various geographic sub-areas, as well as global indexes that categorise stocks into small-cap, mid-cap, and large-cap categories. The four most prominent indexes track emerging markets, frontier markets, developed markets (excluding the U.S. and Canada), and the global market, catering to the diverse needs of investors.

Emerging Markets Index

The MSCI Emerging Markets Index specifically tracks the performance of stock markets in 26 developing countries, including Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, the Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates. This index serves as a crucial tool for investors seeking to understand and navigate the dynamics of emerging markets, highlighting the growth potential and risks inherent in these regions.

China’s decline

This development follows a gradual decline in China's weight within the MSCI EM index, which has been diminishing since its peak in early 2021. Over the past two years, China’s representation in the index has fallen by half a percentage point, paving the way for India's ascent. Currently, India ranks as the sixth-largest market globally, just behind France, and is poised to surpass China in the broader MSCI Emerging Markets Index, which encompasses large, mid, and small-cap stocks from 24 emerging market economies.

Morgan Stanley is optimistic

International brokerage Morgan Stanley has expressed optimism regarding India's continued market performance. In a recent report, the firm maintained an 'overweight' stance on India while adopting an 'underweight' position on China in its pan-Asia EM asset allocation strategy. Morgan Stanley attributes India’s robust performance to its increasing market share, strong new issuances, and enhanced liquidity.
India's economy is currently exhibiting notable growth, with a nominal GDP growth rate in the low teens—approximately three times that of China. This disparity has resulted in contrasting operating and earnings growth trends between companies in the two nations, with Indian firms consistently outperforming their Chinese counterparts.