WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
Jeff Weniger, CFA Head of Equity Strategy
Kevin Flanagan Head of Fixed Income Strategy
Jeff Weniger, CFA: Head of Equity Strategy Read Jeff's Bio
Kevin Flanagan: Head of Fixed Income Strategy Read Kevin's Bio
India is Starting to Rival China in Emerging Indexes
Week of April 23, 2024
Don’t look now, but there could be a new sheriff in town in some of these major indexes. It was not long ago—just before the 2020s arrived—that most emerging markets indexes allocated a single-digit proportion to India. It was a sharp contrast to China’s dominant proportion, which would often exceed the weight of all the other countries combined.
Times changed. Over the last 5 years, the MSCI India Index has returned an annualized 9.8%, while its neighbor went the other way: MSCI China’s total return has declined at a 7% annual clip.
Suddenly we have a situation where the MSCI Emerging Markets Index’s China weight has fallen to 25% while India’s proportion has risen to 17%. In the FTSE Emerging Markets Index, the gap is narrower; China comprises 27% of that index, India 22%.
Though India has been one of the better performing countries in recent years, the country still flies under the radar for many American investors. For example, consider CNBC’s website. Click on the Asian stock market section and quotes for five country indexes will flash before you: the ASX 200 (Australia), Nikkei 225(Japan), KOSPI (Korea), Hang Seng (Hong Kong) and Shanghai Composite (China). India is snubbed.
Because of the sheer overwhelming force of the U.S. in the market cap league table, India remains an afterthought in global allocations, comprising just 1.8% of the MSCI All Country World Index. It is an intriguing situation because many forecasters see India leapfrogging Japan and Germany to become the world’s third-largest economy by 2030. If Goldman has it right, it will jump into the first slot come 2075.
There are catalysts for equity index inclusion too, notably in the form of the index houses getting around to adding India on the fixed income side of the business. JP Morgan is a huge player in bond indexing. This summer will witness India being added to its much-followed JPM GBI-EM Global Diversified Index, with the full phase-in finished by March 2025. However, we should note that another major index house, FTSE Russell, has decided to hold off on boosting India in fixed income for now.
Nevertheless, game this out for a day in the life inside the four walls of some active money management firm.
The fixed income team suddenly finds itself with pressure to buy up Indian sovereign and corporate bonds because the benchmark evolved on them. On the other side of the office sits the equity team, which may or may not have bought too much China in COVID-19’s early days. Because India used to be “just another country” in their emerging markets benchmark, the extent of their India research is possibly on the light side.
Now these two analysts, one fixed income, one equity, are both in something of a scramble.
Before, maybe the fixed income guru was doing zero India research. After all, the country wasn’t in the benchmark, so why bother? But now comes the deep dive. Meantime, the equity research person had just a small handful of India longs “before,” because the country was not yet such a heavy allocation in the benchmark.
But now the indexes are changing on them both, pencils are being sharpened, notes are being compared. In money management, you will have to look hard to find forces more powerful than portfolio drift and benchmark index inclusion when it comes to hunkering down your research process. Inside emerging markets, India has both.
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