The MSCI EM Index change will lead to outflows from India

By Larissa Fernand |  30-04-19 | 
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India’s weight in the MSCI Emerging Markets Index is set to dip this year, as that of China increases and Saudi Arabia gets included. This will have repercussions on flows as various global funds are benchmarked against the index.

India's weight in the MSCI EM index is likely to fall 20 bps by end of this year, assuming a 50% inclusion factor for China A shares, according to a note by Goldman Sachs. Naturally this would potentially lead to outflows; the tentative figure being $3.8 billion (active + passive).

Is this unusual? Not at all. The world’s largest index provider, MSCI Inc, allows its EM indices to change to reflect the evolution of the economies. For instance, Pakistan was removed from EMs in 2009 but added again in 2017. Israel was added in 1995 and removed in 2010.

The MSCI EM Index captures large and mid cap representation across 24 Emerging Markets, and has 1,136 constituents.

Country weights :

  • China: 33%
  • South Korea: 13.02%
  • Taiwan: 11.35%
  • India: 9.16%
  • Brazil: 7.23%
  • South Africa: 5.89%
  • Russia: 3.77%
  • Mexico: 2.65%
  • Thailand: 2.34%
  • Other: 11.59%

Daniel Sotiroff, manager research analyst for Morningstar Research Services, points to two significant changes.


In March 2009, China represented 12% of the MSCI Emerging Markets Index. The country’s ascendance in EM stock indices is undisputable.

Prior to May 2018, China A-shares, or renminbi-denominated shares that traded locally on the Shenzhen and Shanghai exchanges, were excluded from the MSCI Emerging Markets Index and other EM benchmarks. Index providers shied away from including them because they were difficult to trade. The Chinese government restricted access to a select set of institutional investors and imposed quotas that further constrained the investability of these stocks.

But access to the China A-share market has improved significantly over the past several years. Chinese regulators have slowly upped quotas available to institutions. The advent of the Stock Connect programmes, which provide investors with the ability to trade China A-shares through Hong Kong brokers, was another major milestone. Better access to China A-shares has led index providers to recognise their role in the emerging markets universe.

Consequently, EM indices have expanded their reach to include stocks from the China A-share market, which has further increased China's share of the EM pie.

The flagship MSCI Emerging Markets Index added 222 large-cap China A-shares to its roster of constituents in May 2018 and will add more in May and November 2019. Consequently, funds that track the MSCI Emerging Markets or MSCI ACWI indices will have greater exposure to the China A-share market.

MSCI expects that China A-shares will occupy about 3.3% of the MSCI Emerging Markets Index after the November 2019 rebalance.

Other index providers have also started to recognise the role of China A-shares in the emerging-markets universe. FTSE Russell and S&P Dow Jones Indices have announced plans to add these stocks to their emerging markets benchmarks starting in 2019. China A-shares may occupy 5.5% of the FTSE Emerging Index by March 2020 and 5.5% of the S&P Emerging Broad Market Index by September 2019.


Saudi Arabian stocks will find their way into the MSCI Emerging Markets Index and MSCI All Country World Index. MSCI plans to add Saudi stocks in two phases at the May 2019 and August 2019 index reviews.

From a composition perspective, MSCI expects these stocks to account for roughly 2.6% of the Emerging Markets Index after the August rebalance.

The Saudi Arabian market is relatively small and concentrated. It has only 69 member stocks and is dominated by those in the materials and financials sectors. While this market doesn't offer great diversification on its own, it does increase the breadth of the index while providing some counterbalance to markets with a larger representation, like China and South Korea.

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