India overtakes China in world’s biggest investable stock benchmark

India has overtaken China’s weighting in one of the world’s biggest stock market benchmarks, as share sales and rising liquidity in Indian companies make the country more open to investors.

India’s share of the free-float, “investable”, version of the MSCI All-Country World index, which tracks almost all global stocks that can be bought on the open market, rose to 2.33 per cent this month, eclipsing China’s 2.06 per cent.

The shift makes India the sixth-largest weighting in an index that is dominated by US companies. It also reflects demand in India’s red-hot stock market, which is also unlocking shares for global investors to buy just as the Chinese economy slumps and fund managers dump China-related stocks.

“It is a natural evolution of the market,” said Vivian Lin Thurston, a portfolio manager at William Blair Investment Management.

“You have Indian equities performing strongly and Chinese ones lagging. There is a rebalancing happening as MSCI adds and drops names, so some of the Indian stocks that have improved liquidity get a bit more weight in the system.”

India’s blue-chip Nifty 50 index has hit record highs this year as the country’s economy registers the strongest GDP growth of any major economy and millions of middle-class households pile their savings into local mutual funds. Some $38bn of domestic money has flowed into Indian equities this year, exceeding the annual level of each of the past 16 years.

Indian companies have rushed to take advantage of the country’s soaring stock markets, with Ola Electric and mortgage provider Bajaj Housing Finance among the biggest initial public offerings so far this year.

More than $38bn has been raised on its equity market this year, the highest in Asia and more than double the amount over the same period a year ago, Dealogic data shows.

Earlier this month the free float of Indian stocks also supplanted Chinese counterparts as the largest country in the MSCI Emerging Markets investable index, at 22 per cent to 19 per cent.

When not adjusted for free float, China remains ahead of India in the closely watched MSCI Emerging Markets index, which does not include small-cap companies. But China has seen its share fall from 40 per cent in 2020 to a quarter while India’s has risen to a fifth from below 7 per cent 10 years ago.

Even so, China and India, and emerging markets as a whole, are still overshadowed by the bull run in US stocks, which make up two-thirds of the world index. About $4.6tn in assets were benchmarked to MSCI’s All-Country World Investable Market index as of the start of 2024.

“This is very meaningful,” said Martin Frandsen, global equity portfolio manager at Principal Asset Management.

“In India we have seen and recognised the significant improvement from a value creation perspective, we see significant innovation as in China, a lot of opportunities . . . to invest in some great companies.”

Goldman Sachs analysts expect the Nifty 50 to advance 8 per cent and reach 27,500 by the end of September 2025. Those gains will be fuelled by corporate earnings growth in its mid-teens, according to the US bank.

However some analysts are cautioning over valuations in the Indian market. Goldman strategists said the 12-month forward price/earnings for the MSCI India index have hit a record high of 24.7 — making it the most expensive it has ever been.

Thurston warned that the positions of China and India could reverse again if the “depressed” valuations of Chinese companies recovered in the future.

Despite lofty equity valuations, Rajat Agarwal, Asia equity strategist at Société Générale, said flows into India would probably continue amid a more favourable outlook for emerging markets with the US Federal Reserve expected to cut interest rates on Wednesday.

“There is no one on the street not saying that valuations in India are not high,” Agarwal added. But domestic “money is coming in regardless . . . in the near term the flow situation is not going to reverse unless we see some kind of an external shock”.