1 week Ago
India’s stock market rally is ramping up its index weighting and creating a dilemma for global fund managers: sit back and watch as their relative exposure shrinks while the market grows, or buy in at increasingly eye-watering prices. Most find the latter uncomfortably risky and are seeking alternatives, some driving money into India’s smaller companies, while others are looking elsewhere at other emerging markets. The trend has been driven by years of strong earnings in India at the same time as China’s markets have stumbled, upending their weightings in the MSCI Emerging Markets’ Index which serves as a benchmark for global EM funds.
India’s MSCI EM weight has shot to 19 per cent, up from just 8 per cent four years ago and analysts at Nuvama Alternative & Quantitative Research expect it to top 22 per cent by the end of this year. China’s weighting over the same period has collapsed from 40 per cent to 25 per cent, data from MSCI shows. “The convergence between India and China is causing problems for a lot of portfolio managers because if you had a global mandate or a pan-Asia mandate, you probably were at best equal weight India and probably underweight,” said Vikas Pershad, portfolio manager for Asian equities at M&G Investments.
“And that underweight is growing.” Part of the reason for the long-term underweight has been that many investors preferred China’s cheaper and dynamic market, while entry and exit costs for funds can be high in India. Managers would need to buy Indian companies at a rapid clip to keep up with their increasing presence in indexes, which with an average 12-month price-to-earnings ratio of 24 times for big and middle-sized firms are the most expensive in major markets, according to LSEG data.
Many are choosing not to do so, leaving India the biggest underweight allocation among emerging market funds, according to HSBC and Copley Fund Research. Valuations for Chinese blue chips, by contrast, are far lower with the same price-to-earnings measure at 17 and at 15 for big Malaysian stocks. For Gary Tan, portfolio manager at Allspring Global Investments, and his clients, valuations are the sticking point.
“We are optimistic on the long-term story, but really cautious on where valuations are,” said Tan, who has been underweight India for the last couple of years. No secret Valuations have long been relatively high in India and no barrier to outperformance. Now, however, some investors are becoming wary of the risk-reward balance.
India’s Nifty 50 index has risen 145 per cent and the S&P BSE Sensex has surged 136 per cent since mid-2020, while the S&P 500 in the same period has gained 78 per cent and China’s blue-chip index has slid 22 per cent. “India’s economic growth story is not a secret,” said James Cook, investment director for global emerging markets at US fund manager Federated Hermes, who is underweight India and waiting for prices to fall before buying any further. “When you have such a consensus, and the outlook appears to be benign, investors can fall into a trap, blind to any potential pitfalls, such as paying too high a price to participate.
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