The weighting gap between Indian and Chinese equities in the MSCI Emerging Markets index will fall to historic lows at its next rebalance as the two economies' fortunes continue to diverge.
Announcing its quarterly rebalance, MSCI said it was adding five Indian stocks and removing 66 Chinese companies at the end of February.
Even with the addition of five new Chinese stocks the weight gap will fall to its lowest point, with India’s weighting expected to grow from 17.9% to 18.5%, and China’s declining to 25.4%.
Nuvama Alternative & Quantitative Research anticipates the gap will close further with India expected to see over $1.2bn of passive inflows following the rebalance.
The three largest additions to the emerging market index are the Punjab National Bank, the Union Bank of India and Chinese appliance manufacturer Midea Group.
BlackRock has taken an overweight stance on Indian equities and said the world’s fastest-growing economy is likely to benefit further from megatrends.
“India’s talent pool, start-up ecosystem and software firms with a global footprint also make it an up-and-coming hub for artificial intelligence (AI) software, in our view,” the world’s largest asset manager said.
Meanwhile, Chinese equities have struggled due to policy uncertainty and a beleaguered real estate sector.
ETFs tracking the market were buoyed earlier this month after Central Huijin, an investing arm of China’s sovereign wealth fund, announced it would expand its buying of China equity ETFs, but investor confidence remains low.
Research by Bloomberg Intelligence also found India’s stock market is the least concentrated among emerging markets.
The effective number of stocks – those that drive the portfolio – in the MSCI India index is 44 out of a stock count of 131. Conversely, the number of important stocks in the MSCI China index is 29 out of 714 securities.
Kumar Gautam, quantitative equity strategist at Bloomberg Intelligence, said: “The jump in the effective number of Indian equities to 44 in December 2023 from 19 in September 2020 can be attributed largely to a shift in weights away from the top few index heavyweights to the remaining members.
“The weight of reliance industries, for example, dropped to around 8% from 16%. The weight of the top seven companies dropped to around 32% from 50% during this period and Indian mid-cap stocks outperformed their large-cap peers by over 20%.”
The MSCI rebalance will also see 24 stocks added and 101 deleted from the MSCI ACWI while the MSCI ACWI Small Cap index will see 189 additions and 118 deletions.
