In the dynamic world of emerging markets, India is rapidly closing in on China’s dominance in a key benchmark index. This shift presents a tough decision for global investors, who must navigate the vibrant yet pricey Indian stock market versus the more affordable but economically struggling Chinese stocks.
Indian share prices are soaring, buoyed by stock sales and robust earnings growth. These factors have catapulted India to just under 20% of the MSCI Emerging Markets Index, while China’s share has plummeted to around 25%, a significant drop from over 40% in 2020. Next month’s MSCI index review could further elevate India’s position, surpassing Taiwan and placing it directly behind China.
The market difference between India and China has become a hot topic for emerging market investors. The argument centers around whether to invest in the booming Indian market or to take advantage of the lower valuations in China, despite its economic slowdown.
The influence of indices in emerging markets is significant. They not only direct billions of dollars in passive index-tracking flows but also guide active managers in adjusting their exposure relative to established benchmarks.
Domestic investment in Indian equities has surged, with annual net flows averaging $12 billion between 2016 and 2020, and swelling to $29 billion between 2021 and 2023. Despite concerns about the sustainability of these flows and high valuations, investors are wary of missing out on the returns Indian stocks have historically provided.
India has consistently performed well in local currency terms and has kept pace with US markets in dollar terms. It has also been a hotspot for “multi-baggers” – stocks that have increased at least tenfold.
Retail investors in India are driving much of the growth, with many households investing in equities to counteract low interest rates. This domestic buying has more than offset the withdrawal of foreign institutions, whose ownership has fallen to an 11-year low.
China’s weighting in the MSCI index soared after the expansion of mainland-listed companies in 2019. However, mainland stocks are still not fully included. As India edges closer to China in the MSCI index, investors are faced with a complex decision: ride the wave of India’s growth or bet on the potential recovery of China’s undervalued stocks.
(Source: FT)
