When Sentiment and Fundamentals Diverge

India’s EM weight has reset. What happens next?

Since September 2024, Indian equities have experienced a meaningful phase of consolidation. While corporate earnings continued to grow and the economy remained among the fastest-growing major economies globally, market returns moderated as valuations cooled and global investors rotated capital toward AI-linked opportunities in Taiwan and Korea.

One outcome of this shift can be seen in India’s weight within the MSCI Emerging Markets Index.

After reaching a peak of nearly 20% in late 2024, India’s weight has corrected to approximately 12%, bringing it back in line with its long-term average. This decline has not been driven by a deterioration in India’s economic prospects. Rather, it reflects a combination of market correction, relative underperformance and the extraordinary rerating of technology-heavy markets that became beneficiaries of the global AI theme.

The broader picture is worth noting:

• India’s MSCI EM weight is now close to its historical average after spending nearly three years above trend.
• China and India, which together accounted for more than 60% of the EM basket at their peaks, have both seen meaningful reductions in weight.
• Taiwan and Korea have emerged as the principal beneficiaries of global AI-driven capital flows, taking their combined weight to record levels.
• Investor positioning towards India appears significantly less crowded today than it was 12–18 months ago.

Historically, periods of extreme positioning within emerging markets have rarely been permanent. Capital tends to chase near-term winners, but over time, allocations often gravitate back toward economies with durable growth, healthy corporate profitability and strong domestic demand.

India continues to exhibit many of these characteristics. Economic growth remains healthy, corporate balance sheets are stronger than in previous cycles, credit growth remains supportive and the country’s structural drivers remain firmly in place. Today, India’s weight in the MSCI Emerging Markets Index has already corrected from nearly 20% to its long-term average of around 12%, even as the broader economic backdrop remains intact. With investor positioning normalised and expectations significantly lower than they were a year ago, the ingredients for mean reversion are increasingly falling into place.

 If history is any guide, FY2027 could witness a reversal of the trends that have dominated the past eighteen months, with capital gradually rediscovering markets where fundamentals remain stronger than prevailing sentiment. India appears well positioned in that context.

 

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