Emerging market funds reduced their allocations to India and Taiwan in January, while increasing their allocations to China and Hong Kong, with 24 out of 25 funds having lower allocations to India, Nomura said. This distinct leaning towards China is only expected to continue with Indian markets being volatile.
The allocation has reduced marginally by 0.3 percentage point. India was one of the major markets to which allocation has been cut, with most emerging market funds being underweight on both India as well as China, Hong Kong at the end of January, the brokerage said.
Around 62 per cent of emerging market funds are underweight India while 31 per cent are overweight. Compared to end-December 2024 picture, this distribution was 56 per cent and 40 per cent, respectively, Nomura said.
On an overall basis global EMs are underweight EM Asia, the broker said.
MSCI indices rejig
The rejig in MSCI indices this month will raise India’ weightage 20 bps higher to 19 per cent in the MSCI Emerging Markets index, but it is not going to have a significant impact as far as allocations are concerned. Inflows of $800 million to $1 billion are expected due to this increased weightage.
“Stocks that are likely to be included stand to benefit, but despite the bump up in the weightage, the nation’s position in the basket has slipped to third place, behind China and Taiwan, due to the ongoing correction. Therefore, unless sentiment improves and draws in long-term flows, we should expect downside volatility to not disappear in a hurry,” said Akshay Chinchalkar, Head of Research, Axis Securities.
DeepSeek issue
He pointed out that the DeepSeek episode has led to a rotation out of India stocks and into China.
“DeepSeek has triggered an influx into Chinese stocks at a rapid rate while slowing growth, plateauing corporate earnings, FX volatility and expensive valuations have been headwinds India continues to grapple with,” he added.
Chinese equities have added over $1.3 trillion in value over the last month while India’s valuation has shrunk by over $700 million. “We don’t think that DeepSeek is an isolated episode – it is a message to the world that China is a force to reckon with when it comes to the global AI revolution.”
The threat of tariffs is another factor and Chinchalkar said that large caps would continue to offer refuge to all the volatility being seen, “particularly in small and midcaps, where the froth is truly getting eliminated.”