Mumbai: With further growth in India’s GDP, global financial services major Morgan Stanley said India’s weight in the MSCI emerging market (EM) index would rise in the coming years, which would attract a greater amount of foreign portfolio flows leading to a spurt in mega-cap stocks.
India’s index weight still lags behind India’s GDP. While India ranks among the top three in the emerging market basket in terms of GDP, it barely makes it into the top 15 in terms of index weight.
The part of this under representation problem, according to Morgan Stanley, is India’s smaller free float (the portion of equity available for public shareholders).
“However, the gap between index weight and GDP rank is likely to keep closing, while India’s GDP weight gains share. Indeed, India’s foreign free float should also rise as new securities get listed and enter the index. As India’s index weight rises, it will probably attract more non-long-term money, or what we can loosely call ‘tourist flows’. Such flows will mostly look for large cap, liquid names through which to participate in the India story,” it said.
The global investment bank further added that the domestic institutional investors are also likely to grow bigger in size as increasing number of individuals shift their savings from physical assets to financial assets.
It expects $216 billion or Rs 14 lakh crores of fresh money from domestic mutual funds in the coming decade as against $45 billion over the last 10 years. “The other large source of domestic flows will likely be retirement funds. On a combined basis, we expect equity saving via these retirement funds to reach $170 billion by FY26,” Morgan Stanley said while highlighting the need to identify future mega-cap stocks that can outperform the markets in coming years.
Mega-cap stock is defined as stocks with a market capitalisation in excess of $10 billion.
There are currently 45 such stocks in the Indian market while there are 78 stocks with a market capitalisation in the range of $3 billion to $10 billion.
“The $10 billion club made rapid strides in the 2004-08 bull market but has been range bound since then, only recently breaching its 2008 high. We suspect that as India’s growth cycle recovers, this ‘club’ will grow – albeit not as rapidly as it did in the previous bull market, given that we are at a significantly higher level compared to 2003,” it added.
