India drops to third spot in MSCI EM index amid rout in Adani group stocks

Red-hot Taiwanese market, Adani rout erode India's weighting

India’s ranking on the MSCI (Morgan Stanley Capital International) Emerging Markets (EM) Index, which is said to be tracked by passive funds with assets under management of more than $350 billion, has slipped, following last month’s underperformance amid rout in Adani Group shares.

With a weighting of 12.97 per cent, India is now ranked third after China and Taiwan which have a weighting of 33.49 per cent and 14.42 per cent, respectively, according to the factsheet released by the global index compiler.

At the end of December 2022, India had a weighting of 14.44 per cent and occupied second place for the first time. The ascent came after outperforming the EM pack in Calendar 2022.

The MSCI India fell 8 per cent, even as the MSCI EM Index declined 20 per cent — both in US dollar terms.

Come 2023, there has been a reversal of fortune, with MSCI India dropping 3 per cent in January and MSCI EM gaining 8 per cent.

Within EMs, the MSCI Taiwan Index has been a sharp outperformer, gaining nearly 13 per cent last month.

Brian Freitas, a New Zealand-based analyst with Periscope Analytics who has researched Adani Group, said the drop in India’s ranking is largely on account of two factors.

“MSCI Taiwan went up sharply in January, driven by a 16.4 per cent rally in Taiwan Semiconductor Manufacturing Company (TSMC). TSMC is around 45 per cent of the MSCI Taiwan Index weight. On the other hand, MSCI India was down about 4 per cent in January, of which 1.7 per cent was due to a drop in Adani Group stocks,” said Freitas.

During the four trading sessions, between January 24 and January 31, over Rs 5.6 trillion, or 29 per cent, got shaved off from Adani Group after US short-seller Hindenburg Research levelled accusations of fraud against the conglomerate.

Shares of the group have seen further erosion in market value so far this month, which could put more pressure on India’s weighting in the coveted MSCI EM Index.

High weighting in the MSCI index can help channel billions of dollars of flows from global exchange-traded funds.

Abhilash Pagaria, head-alternative and quantitative Research, Nuvama Institutional Equities, said the weighting could now consolidate around current levels.

“India’s weighting climbed to record levels in November after a phenomenal rally over EM peers. Since then, our markets have underperformed. India’s valuation is still at a premium to other EMs, as well as compared to its historical levels. Therefore, a significant increase in weighting from the current levels will be challenging,” he said.

For nearly a decade, India’s weighting in the MSCI EM Index remained below 8 per cent. In the past two years, India’s weighting doubled as markets grew in size and considerable legroom meant for foreign portfolio investors (FPIs) in domestic companies got freed up by a change of rule by the government.

“Last year, we saw the trend ‘sell China and buy India’ play out. A lot of global funds began shifting from China to India due to regulatory problems there. This year, China has made all the right noises, while the developments in India are of concern to FPIs,” said an analyst with a foreign bank.

Last week, the Indian market dropped out of the top five nations in terms of the highest market capitalisation.