Can MSCI India weight converge with China’s?

UBS Global Research indicates that the prospect of India's weight in the MSCI Emerging Markets Index converging with China's has diminished, following China's 33% year-to-date outperformance and its current index weight being double India's. The firm projects China's profit pool to remain twice as large as India's over the next five years and notes China's more favorable relative valuation, trading at a 33% discount to India. Despite India's structural growth, UBS maintains an "overweight" position on China and "underweight" on India, citing China's stronger return on invested capital and lower corporate leverage.

Analysis

UBS Global Research indicates a diminished probability of MSCI India's weight converging with China's in the Emerging Markets Index over the next five years. This assessment follows China's significant 33% year-to-date outperformance against India in U.S. dollar terms, reversing prior convergence narratives. Consequently, China's index weight has re-established itself at roughly double that of India.

The firm projects China's profit pool to remain twice as large as India's over the next half-decade, underpinned by stronger return on invested capital (ROIC) trends and lower corporate leverage in Chinese corporates. Furthermore, China's relative valuation now appears more attractive, trading at a 33% discount to India, a divergence that has widened significantly in recent years. This valuation gap suggests a perception difference, where a comparable stock in India could command 2.3 times the market capitalization of one in China.

Despite India's structural growth potential, UBS maintains an "overweight" stance on China within the emerging-market universe and an "underweight" position on India. This positioning reflects the continued favorability of China's economic and corporate profit size, alongside its more compelling valuation and fundamental metrics. The outlook also assumes a modest inclusion factor for China A-shares.

Key Decisions for Investors

• Investors should reassess their allocation to Indian equities, particularly those benchmarked to MSCI India, given UBS's underweight stance and the reduced probability of index weight convergence with China.
• Consider increasing exposure to Chinese equities, potentially through MSCI China-linked instruments, to capitalize on the 33% valuation discount and stronger fundamental metrics like ROIC and lower corporate leverage.
• Closely monitor the divergence in relative valuations and corporate profitability trends between China and India, as these are identified as key drivers for future equity performance.