Investors in the global market are facing a dilemma as India’s stock market rally continues to ramp up its index weighting, causing their relative exposure to shrink. They are left with the choice of either buying in at increasingly high prices or seeking alternatives. One of the alternatives being pursued is investing in India’s smaller companies or exploring other emerging markets. This trend has been driven by India’s strong earnings performance in contrast to China’s market struggles, leading to a shift in weightings in the MSCI Emerging Markets Index.
India’s weight in the MSCI EM index has risen significantly in recent years, reaching 19% from just 8% four years ago and expected to surpass 22% by the end of the year. In comparison, China’s weight has declined from 40% to 25% during the same period. This convergence between India and China has posed challenges for portfolio managers with global or pan-Asia mandates who may have been underweight on India due to preferences for China’s market dynamics and lower entry and exit costs.
The high valuations of Indian companies, with an average price-to-earnings ratio of 24 times for big and mid-sized firms, compared to 17 for Chinese blue chips and 15 for large Malaysian stocks, further complicate investment decisions. Managers are cautious about buying into Indian companies at a rapid pace to keep up with their increasing index weight, making India the largest underweight allocation among emerging market funds. Despite optimism about India’s long-term growth story, many investors remain cautious about valuations.
While India’s stock market has seen significant gains in recent years, investors are starting to shift their focus as foreign investment flows into Indian stocks show signs of slowing down. Foreign buying has been higher in small to mid-size firms compared to large caps, and exchange data revealed a shift towards selling by foreigners in August. Foreign investors currently hold about 16% of total Indian stocks, the lowest in a decade. However, there are still plenty of bulls and non-benchmarked money flowing into the Indian market.
Other emerging markets such as Malaysia and Indonesia are attracting investor interest as their markets experience surges, offering attractive opportunities for investors looking elsewhere. Some fund managers, like Howie Schwab from Driehaus Capital and Vivian Lin Thurston from William Blair, acknowledge the ongoing interest in India but are also exploring potential opportunities in other markets. The consensus on India’s economic growth story is well known, but investors are wary of paying high prices to participate, waiting for a potential correction in prices before increasing their exposure to the Indian market. Overall, the dilemma faced by global investors highlights the complexity of navigating the shifting landscape of emerging markets.
