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SINGAPORE – India’s stock market rally is ramping up its index weighting and creating a dilemma for global fund managers: sit back and watch as their relative exposure shrinks while the market grows, or buy in at increasingly eye-watering prices.

Most find the latter uncomfortably risky and are seeking alternatives, some driving money into India’s smaller companies, while others are looking elsewhere at other emerging markets.

The trend has been driven by years of strong earnings in India at the same time as China’s markets have stumbled, upending their weightings in the MSCI Emerging Markets’ Index which serves as a benchmark for global EM funds.

India’s MSCI EM weight has shot to 19%, up from just 8% four years ago and analysts at Nuvama Alternative & Quantitative Research expect it to top 22% by the end of this year. China’s weighting over the same period has collapsed from 40% to 25%, data from MSCI shows.

“The convergence between India and China is causing problems for a lot of portfolio managers because if you had a global mandate or a pan-Asia mandate, you probably were at best equal weight India and probably underweight,” said Vikas Pershad, portfolio manager for Asian equities at M&G Investments.

“And that underweight is growing.”

Part of the reason for the long-term underweight has been that many investors preferred China’s cheaper and dynamic market, while entry and exit costs for funds can be high in India.

Managers would need to buy Indian companies at a rapid clip to keep up with their increasing presence in indexes, which with an average 12-month price-to-earnings ratio of 24 times for big and middle-sized firms are the most expensive in major markets, according to LSEG data.

Many are choosing not to do so, leaving India the biggest underweight allocation among emerging market funds, according to HSBC and Copley Fund Research.

Valuations for Chinese blue chips, by contrast, are far lower with the same price-to-earnings measure at 17 and at 15 for big Malaysian stocks.

For Gary Tan, portfolio manager at Allspring Global Investments, and his clients, valuations are the sticking point.

“We are optimistic on the long-term story, but really cautious on where valuations are,” said Tan, who has been underweight India for the last couple of years.

NO SECRET

Valuations have long been relatively high in India and no barrier to outperformance. Now, however, some investors are becoming wary of the risk-reward balance.

India’s Nifty 50 index has risen 145% and the S&P BSE Sensex has surged 136% since mid-2020, while the S&P 500 in the same period has gained 78% and China’s blue-chip index has slid 22%.

Yet while foreigners have been consistent buyers of Indian stocks this year and in 2023, the flow and sentiment is beginning to shift.

ICICI Securities data shows foreign buying over the first half of this year has been much higher in small to mid-size firms than in large caps and in August, exchange data showed foreigners turned sellers of USD 662 million in shares.

Foreign investors account for roughly 16% of total Indian stock holdings, according to ICICI Securities, the lowest in a decade.

To be sure, there are plenty of bulls and money that isn’t benchmarked to emerging markets’ indexes that is flowing in.

Howie Schwab, portfolio manager for emerging markets growth at Driehaus Capital, said there’s an increased interest from global investors in India, not just from those with emerging markets mandates.

Vivian Lin Thurston, portfolio manager for William Blair’s emerging markets growth strategy, says valuation alone is not necessarily reason enough to look elsewhere.

“Do I have another attractive opportunity set to put money in if I take down India, the answer is not many at present, and this is a factor I’m struggling with, or grappling with,” she said.

However flows into Malaysia and Indonesia, where markets are on a tear, point to investors looking further afield, for now.

“India’s economic growth story is not a secret,” said James Cook, investment director for global emerging markets at US fund manager Federated Hermes, who is underweight India and waiting for prices to fall before buying any further.

“When you have such a consensus, and the outlook appears to be benign, investors can fall into a trap, blind to any potential pitfalls, such as paying too high a price to participate.”

(Reporting by Ankur Banerjee in Singapore, additional reporting by Gaurav Dogra and Bharath Rajeswaran in Bengaluru; Editing by Tom Westbrook and Shri Navaratnam)

 

NEW YORK – US stocks finished slightly lower in choppy trading on Wednesday following labor market data and comments from a Federal Reserve official that bolster the case for an interest rate cut.

Labor Department data showed that US job openings fell to a 3-1/2-year low in July, indicating continued easing of labor market tightness that could strengthen the Fed’s hand to begin cutting rates at its next meeting later this month.

The benchmark S&P 500 and Nasdaq edged to a lower close while the Dow ended slightly higher. Utilities and consumer staples stocks led the gainers while energy and technology equities were the main drag. Six out of 11 S&P 500 sectors ended lower.

“This is always a rocky period in September but the economy is holding up,” said Bill Strazzullo, chief markets strategist at Bell Curve Trading in Boston. “The consumer is fine, the labor market is fine. I’m still bullish overall.”

Shares of Nvidia, which suffered a massive USD 279 billion drop in market value on Tuesday, closed 1.7% lower. Shortly before the close of trading, the company denied a media report that it received a subpoena from the US Department of Justice.

Other megacap growth stocks fell, including Apple which ended 0.9% lower. Microsoft dipped 0.1%, Alphabet dropped 0.5% and Amazon.com slipped 1.7%. Tesla shares rose 4.2%.

Raphael Bostic, Atlanta Fed president, said on Wednesday the central bank must not keep interest rates too high much longer or it risks causing too much harm to employment. He added that waiting until inflation falls back to the Fed’s 2% goal before cutting rates “would risk labor market disruptions that could inflict unnecessary pain and suffering.”

In the previous day’s session, all three Wall Street indexes slumped to their biggest one-day loss since early August as investors dumped technology-related stocks in a dour start to September – which is historically the worst month for equities.

“Utility stocks are up today because of weak data in jobs that just bolsters the case that when the Fed meets in about two weeks they are going to cut rates by at least 25 basis points,” said Eric Beyrich, co-chief investment officer at Sound Income Strategies.

The Dow Jones Industrial Average rose 38.04 points, or 0.09%, to 40,974.97, the S&P 500 lost 8.86 points, or 0.16%, to 5,520.07 and the Nasdaq Composite lost 52.00 points, or 0.30%, to 17,084.30.

The Philadelphia SE Semiconductor index rebounded from its biggest one-day drop since the COVID-19 pandemic in the previous session and ended up 0.25%.

Advanced Micro Devices rose nearly 3% after it named former Nvidia executive Keith Strier as senior vice president of global AI markets.

Zscaler fell nearly 19% after the company forecast fiscal 2025 revenue and profit below estimates. Dollar Tree slumped 22% after the discount store operator trimmed its annual sales and profit forecasts.

Total volume across US exchanges was about 10.5 billion shares, down from a 20-day moving average of nearly 11 billion shares.

(Reporting by Chibuike Oguh in New York; additional reporting by Johann M Cherian, Bansari Mayur Kamdar, and Purvi Agarwal in Bengaluru; Editing by Matthew Lewis)