MSCI (Morgan Stanley Capital International), a leading global index provider, has decided to slash dozens of Chinese companies from its global benchmarks. This decision comes on the heels of the turmoil in China’s stock market, which witnessed trillions of dollars in value wiped out.
Simultaneously, MSCI has elevated India’s weightage in its Global Standard (Emerging Markets) index to a historic high of 18.2%, marking a pivotal moment in the global investment landscape.
MSCI’s decision on India underscores the country’s robust economic performance and strategic policy decisions.
In its February review, MSCI added five Indian stocks to its Global Standard index without any deletions.
This move reflects confidence in India’s market resilience and its potential as an attractive investment destination. Notably, the country’s weightage in the index has nearly doubled since November 2020, positioning it as the second-largest constituent after China.
Factors driving India’s rise
Several factors contribute to India’s ascending prominence in MSCI’s Global Standard index.
Primarily, it’s the standardized foreign ownership limit (FOL), implemented in 2020, which has enhanced transparency and accessibility for global investors.
In addition, the sustained rally in domestic equities has bolstered India’s appeal, showcasing the country’s economic resilience amid global uncertainties.
Relative underperformance of other emerging markets, particularly China, has further tilted the scales in favor of India.
Conversely, the exclusion of 66 Chinese stocks from MSCI’s global benchmarks reflects the challenges facing China’s market. The ongoing concerns about China’s struggling property sector and weak consumption have dampened investor confidence, leading to a decline in China’s weighting in global portfolios.
The move by MSCI to trim Chinese stocks is the highest tally of exclusions in at least two years, signifying a significant shift in investor sentiment.
Global investors’ response
The implications of MSCI’s decision reverberate across the portfolios of global investors. The move to cut Chinese stocks suggests a reassessment of risk and a desire for diversification.
Investors, already wary of China’s economic uncertainties, may view India as a more stable and promising alternative.
As China’s weight diminishes in global portfolios, there is a growing recognition of the need to explore other emerging markets, and India’s elevated position becomes increasingly appealing.
While the removal of Chinese stocks may be perceived as a risk-mitigation strategy, it also presents an opportunity for investors to reallocate funds to regions with growth potential.
India, with its burgeoning consumer base, economic reforms, and tech-driven innovation, is becoming an increasingly attractive prospect for those seeking diversification beyond the traditional powerhouses.
Global investors must adapt to this evolving environment, recognizing both the risks and opportunities presented by these strategic shifts.
As the investment community embraces diversification, India’s ascent in MSCI’s indices signals a new era in global portfolio management – but it would be foolish to write off China, which has proved its resilience time and again.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.