India vs China battle in MSCI EM intensifies as elephant’s weight doubles in 4 years, dragon weakens

The tectonic plates of global finance are shifting with the underdog India doubling its weight in the coveted MSCI Emerging Markets (EM) index in just four years. Meanwhile, China, the previous undisputed leader, finds itself facing a decline in its influence. This power shift has ignited a global conversation, with many asking: is this the dawn of a new era for India, and can the elephant truly leave the dragon behind?

India's rise has been nothing short of meteoric. Fueled by a sustained bull run in its stock market and impressive economic growth, its weightage in the MSCI EM index has catapulted from a mere 8% in 2020 to a record-breaking 18.2% as of February 2024. This remarkable ascent is attributed to a confluence of factors, including strong corporate earnings, robust foreign investment inflows, and a revised narrative of resilience and growth potential. As Ashish Gupta, CIO of Axis Mutual Fund, aptly states, "India has rewritten its growth story," and the global financial community is taking notice.

In 2023, India's stock count in the MSCI Standard index rose to 131, with the inclusion of a net of 17 Indian stocks over the past four reviews. This marks an improvement from 2022, where only 9 Indian stocks were included.


However, the picture isn't as rosy for China. The once-unassailable dragon is now facing a different reality. A combination of slumping stock prices and capital outflows has led to a significant decline in its weightage, from a dominant 37%-plus levels in 2020 to a more modest 24.87% currently. This decline highlights the challenges China faces in maintaining its previous dominance, raising questions about the future trajectory of its economic model.

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Will this contrasting trajectory continue in the coming year to take India's weight to 20% level in the MSCI EM index?

“To reach China’s weight in the index India’s weight would have to rise around 6% per year for the remainder of this decade. It’s not impossible, if India’s corporate earnings continue to grow at a healthy clip, which I think they will. But in order for it to happen, the corporate earnings growth of China and the others would have to be substantially lower than India’s,” Mark Matthews, Head of Research for Asia, Julius Baer, told ETMarkets.

The trend of India’s increasing weight in the index is expected to continue but the pace of growth may slow down.

“In our view, projecting a further increase in India’s weight to 20% in the coming year seems challenging as the tailwinds driving valuation upside are expected to diminish, especially with Indian indices trading at all time highs. However, this doesn’t imply stagnation for India’s weight, given the positive outlook for both domestic and FII flows in India. Therefore, while India’s weight is likely to witness continued upward bias, the pace of increase is expected to moderate in the coming year,” said ArunaGiri N, Founder CEO & Fund Manager, TrustLine Holdings.

The implications of this shifting landscape are far-reaching. For India, this rise in prominence could translate into significant benefits. Increased foreign investment inflows could further boost its stock market, providing much-needed capital for infrastructure development and economic expansion.

However, this newfound influence also comes with its own set of challenges. Concerns about potential stock market bubbles and the sustainability of India's growth remain. Additionally, managing expectations and ensuring responsible financial management will be crucial in navigating this rapid ascent.

Whether the elephant can truly leave the dragon behind remains to be seen, but one thing is for sure: the competition is on, and the world is watching with bated breath.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)