India to top China among emerging markets, equities rally at 'halfway mark', says MS

India could soon overtake China as the most influential in a key emerging markets index, pulling in more foreign funds and adding fuel to a stock market rally that, though already among the best globally, is "only past the halfway mark", Morgan Stanley said. 

The South Asian country's weightage in the MSCI emerging markets index rose to 19.8 per cent after a rejig in August, closing in on China's 24.2 per cent. India's weightage has steadily increased from 9.2 per cent in December 2020, while China's has dropped from 39.1 per cent.

"A rising weight essentially means more absolute foreign flows," analysts led by Ridham Desai said in a note on Wednesday.

"In the context of India being underweight in the average emerging markets portfolio, this is even better for foreign portfolio flows."

Foreign portfolio investors (FPIs) have bought shares worth Rs 53,178 crore ($6.33 billion) so far in 2024, and have remained net buyers since June, bolstered by policy continuity after the country's elections and an imminent start to global interest rate cuts.

So far, the sustained inflows from domestic institutional investors, mutual funds and retail traders have helped power the benchmark Nifty 50 to record highs. Its 16 per cent jump this year is more than most other markets, including China.

Desai expects the rally to continue as fiscal consolidation allows private borrowing and spending to fuel the next leg of earnings growth and as higher FII inflows will keep liquidity in surplus, lending resilience.

"We think we are only past the halfway mark in the current bull market. A bull market peak for India is possibly still in the future and the weight in the EM index could have some more distance to travel before it peaks."

Morgan Stanley retained India as its top pick among emerging markets and second favourite, behind Japan, in the Asia-Pacific region.

Among stocks, it prefers cyclicals over defensives and large-caps over small-caps. And among sectors, it is 'overweight' on financials, technology, consumer discretionary and industrials, and is 'underweight' on others.