India Overtakes China As Largest MSCI Emerging Markets IMI; Morgan Stanley Remains Optimistic

India has achieved a milestone by surpassing China to become the world's largest market in the MSCI Emerging Markets (EM) Investable Market Index (IMI). As of the end of August, India now leads across emerging markets, marking a shift in global economic power. According to the MSCI IMI, India's market dominance places it as the sixth-largest market globally, just behind France, while China's weight in the index has been shrinking since its peak in early 2021.

This development comes as China's weight in the MSCI EM index has gradually dropped, creating the opportunity for India to step into the spotlight. Over the past two years, China's weight in the index has fallen by half a percentage point, opening the door for India's rise. Now, India is closing in on overtaking China in the broader MSCI Emerging Markets Index, a benchmark that includes large, mid, and smallcap stocks from 24 emerging market economies.

International brokerage Morgan Stanley remains optimistic about India's continued market outperformance. In a recent note, the brokerage reiterated its 'overweight' stance on India, while maintaining an 'underweight' position on China in its pan-Asia EM asset allocation strategy. Morgan Stanley attributes India's strong performance to its growing market share, robust new issuances, and improved liquidity.

India's economy is currently demonstrating significant resilience and growth. The country's nominal GDP growth rate is running in the low teens, which is three times the growth rate of China. This difference has led to divergent operating and earnings growth between companies in the two countries, with Indian companies outperforming their Chinese counterparts.

Morgan Stanley's confidence in India's trajectory is also fueled by domestic market dynamics, where foreign investors are facing increased competition from domestic participants. The brokerage emphasized that the growing pipeline of new equity issuances will be crucial in increasing foreign investor participation in Indian equities.

India officially overtook China in the MSCI EM IMI on September 4, 2024, marking the first time that India has held the largest weight in the index. This shift highlights India's growing influence in the global financial landscape, and with continued market performance, India is poised to strengthen its position further in the MSCI Emerging Markets Index.

The MSCI Emerging Markets IMI is a comprehensive index that tracks large, mid, and smallcap stocks across emerging market economies. It serves as a key indicator for investors looking to gauge the strength of emerging markets.

Morgan Stanley's analysis raises important questions about what this development means for Indian equities. While the outperformance of Indian markets is undoubtedly positive, the brokerage highlights the need for more foreign investor participation. Currently, domestic market participants are outbidding foreign investors for the same equities, a trend that could be balanced with more new issuances.