Foreign funds that mimic MSCI Index may allocate more money to Indian equities.
In its quarterly review, the Morgan Stanley Capital Index (MSCI) has decided to induct six Indian stocks into the MSCI Emerging Markets Index from May 31. These stocks, which have been selected after much scrutiny, are Titan Industries, Dabur India, Asian Paints, Shriram Transport, Bank of India and Mundra Port and SEZ. The addition has not been accompanied by any deletions as is the case for many other countries. The inclusion augurs well not only for these stocks but also for India’s equity markets in the long term, as foreign ownership in these stocks will go up, believe fund managers.
But the significance of this does not end here. These six additional stocks has taken up India’s tally of stocks in the emerging market index to 72 from 64. Consequently, India’s weighting in the index has also gone up 13 basis points to 7.24 per cent. China’s weighting, too, has gone up from 17.71 per cent to 17.82 per cent, with eight new stocks joining the club. Countries with relatively high weighting increases in the MSCI Emerging Markets Index are India, Malaysia and China, while that of Brazil, Taiwan, and South Africa has fallen.
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As Indian corporations grow, India’s weighage in the global benchmark indices is only likely to rise. Several foreign brokerages have been advising their clients to increase their exposure to India before the change in weighting could happen. Several index funds mimic the MSCI’s global indices while allocating money, so this increase will mean higher allocation for Indian equities from such funds. So there is a direct link between India’s weighting in the index and allocation of foreign funds to Indian markets.
However, this does not mean Indian equities will deliver better returns. While a larger portion of the index funds will be allocated to India now, the performance of the market will not significantly change in the near term. Credit Suisse says while Indian equities may see a near-term bounce, as relative growth in India would look good, this may not last long due to structural problems. In its strategy note, CS says India’s growth slowdown is largely driven by structural inflation (only a small portion of it is imported), stuttering reforms and poor governance in some states. So while India’s long-term story remains intact, Indian equities will not outperform till some of these issues are addressed.