Musings with Analyst, August 2024

A Surge in Indian Markets: A Global Perspective

‘India is the last bull market standing in the world’, exclaimed Ruchir Sharma, Chairman of Rockefeller Capital Management, when asked about the staggering run-up of the Indian equity market. Quite likewise is the resilience that the Indian markets have shown over the past couple of years pretty much dodging all speed-breakers that came its way. COVID-19, Russia-Ukraine, Iran-Israel, Lok Sabha Elections, Union Budget, and the list goes on. While internally a lot of things have changed, in this edition of Musings with Analyst we will take a look at how this massive run-up in Indian markets has affected India’s global standing. 

Let’s start by talking about the MSCI/Morningstar Emerging Market Index. What is this index? The MSCI/Morningstar Emerging Markets Index is a list of stocks from companies in developing countries around the world. It includes countries like India, China, Taiwan etc. where the economies are still growing and maturing. The index is used by investors to track the performance of these markets as a whole, giving them an idea of how emerging markets are doing compared to developed markets like the U.S. or Europe. You could think of it as a stock market report card for various developing economies. 

Now, let’s quickly understand the weightage methodology of this index. To put it simply, the weightage of each country in the MSCI/Morningstar Emerging Markets Index is determined by the market capitalization of its publicly traded companies that are included in the index. Broad factors that are taken into consideration in the calculation of this index – 

• Market Capitalization: This refers to the total value of a company’s outstanding shares of stock. The higher the market capitalization of companies from a particular country, the greater the weight that country will have in the index.

• Free Float: Only the shares that are freely available for trading by the public (excluding those held by insiders or the government). This adjusted figure is called “free-float market capitalization” and is used to calculate the index.

• Country Representation: The weight of each country in the index is a reflection of the total free float market capitalization of all the companies from that country that are included in the index, compared to the total free float market capitalization of all companies in the index.

• Regular Updates: A periodic review is undertaken to reflect changes in market conditions, such as significant shifts in stock prices, new companies being added, or changes in the economy of a country.

So, if a country’s stock market grows rapidly, or its companies perform well, its weight in the index will increase. Conversely, if a country’s market underperforms, its weight in the index will decrease.

With that view in mind, take a look at the performance of a few select emerging markets over the past five years.

Not only have we done exceptionally well, but also managed to outperform our most famous contemporary, i.e. China by a huge margin. Notice the pronounced divergence between India’s and China’s lines. 

Similar is the story when it comes to the rise of India’s weightage in the MSCI Emerging Market Index. 

One of the main reasons for the increased investment in India is the fundamental changes happening in its equity market. Over the past five years, the market has grown considerably, fueled by a rise in new stock listings. 

To provide perspective, 2024 is set to be crowned as the ‘Year of IPOs”. According to a Trendlyne report, as many as 204 companies have listed so far in 2024 with almost half the year still to go. 

According to Dealogic, India now ranks as the second biggest IPO market, behind only the US and ahead of Japan, UK, Saudi Arabia and China, with firms collectively raising ~$33 billion this year till August 6 in the equity capital markets. A lot of regulatory and ancillary framework changes have been undertaken over the past five years which has enabled the entry of a plethora of new-age Indian startups onto the Indian stock exchanges. 

Trend of Average Allocation to India by Global Emerging-Markets Funds

This shift of global eyes towards Indian markets is not just a short-lived phenomenon. This marks the significant turnaround in global standings and is a testament to the massive progress that India has made. We are a force to reckon with. Not to mention that we are at crucial crossroads and it is imperative to keep the growth engine running. While fundamentals have been improving, considerable contribution to this Indian rally has come from the financialization of Indian savings. As more Indians move from traditional assets and choose equity markets as a plausible avenue to park their money, the more depth it will provide to the Indian financial ecosystem. Let’s see the Indian Growth Story unfold!

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