India on the Path to Dominance in the Emerging Markets Index: Morgan Stanley Sees Further Potential

India could soon replace China as the most dominant nation in a major emerging markets index. This forecast comes from Morgan Stanley, which anticipates an increased inflow of foreign capital that may further fuel the current stock market rally. The Indian stock market is already among the strongest globally and, according to Morgan Stanley, is "just beyond the halfway mark." Due to a restructuring in August, the weight of the South Asian nation in the MSCI Emerging Markets Index increased to 19.8%, approaching China's 24.2%. Since December 2020, India's weight has steadily risen from 9.2%, while China's weight has decreased from 39.1%. "A rising weight essentially means more absolute foreign capital inflows," explained analysts led by Ridham Desai in a statement. "Given that India is underweighted in the average emerging markets portfolio, this is even more advantageous for international portfolio flows." Foreign portfolio buyers have acquired shares worth 531.78 billion rupees ($6.33 billion) in 2024 so far and have remained net buyers since June. This trend has been supported by political stability following the elections and the anticipated global interest rate cuts. Consistent inflows from domestic institutional investors, mutual funds, and private investors have driven the Nifty 50 index to new highs. Its 16% rise so far this year has outperformed many other markets, including China. Desai expects the rally to continue, as fiscal consolidation fuels private credit and spending behavior, driving the next earnings growth cycle. Higher foreign investor flows will also maintain liquidity in surplus and strengthen resilience. "We believe that we are just beyond the halfway mark in the current bull market. A peak for the Indian market may yet be in the future, and its weight in the EM index could continue to rise before it reaches its apex." Morgan Stanley maintains India as its top pick among emerging markets and its second favorite choice behind Japan in the Asia-Pacific region. The investment bank prefers cyclical over defensive stocks and favors large-caps over small-caps. In terms of sectors, it is 'overweight' in finance, technology, consumer, and industrials, while remaining 'underweight' in other sectors.