Backed by fundamentals and New Delhi’s commitment to attracting private capital, the trend would continue, increasing global investor interest and focus in India over time, Pettit said. He underscores the importance of energy transition projects for developed and emerging market economies as institutional investors remain focused on managing long-term financial risks and identifying growth opportunities in a rapidly changing world.
Edited experts:
How important is India in the scheme of things for MSCI?
Our data shows that India is ranked as the sixth largest by weight in the MSCI ACWI IMI (all-country world investable market index) and the second largest in the MSCI EM IMI (emerging market investable market index), rising from the 13th and 4th positions each in 2020.
The MSCI India IMI Index, which covers approximately 99% of the free float-adjusted market capitalization of the Indian equity universe, is a component of these broader indexes and represents the Indian equity opportunity set. Transformations in the Indian stock market, such as an increase in IPOs (initial public offerings), changes in foreign ownership rules, and technological advancements have contributed to dynamic changes in market liquidity and the number of constituents in this index.
Over the past few decades, there has been a notable shift in the composition of the index, away from manufacturing and industrial activities that were dominant in the 1990s to a growing prominence of sectors associated with the services economy.
MSCI private-capital data indicates that Indian private markets have also seen substantial growth over the past decade, paralleling the expansion observed in its public markets.
There is a changing dynamic in the listed space with earnings of small- and mid-cap companies in electronics manufacturing services, healthcare and renewables compounding at high double digits in the past few years while large index-based companies, with sizeable FII holding, are hardly growing. You see these new companies have a potential for inclusion in your indices?
According to MSCI Research, over half of the constituents in the MSCI India IMI Index joined since 2020, pointing to a new wave of entrepreneurial innovation. These entrants include new access firms notably oriented towards the digital economy, future mobility and fintech innovation themes and account for about 20% of the market by number and just under 7% by capitalization.
MSCI private-capital data indicates that Indian private markets have also seen substantial growth over the past decade, paralleling the expansion observed in its public markets. If historical IPO trends persist, the pipeline of technology and consumer-services firms in the private markets may change the composition of the public market.
These trends underscore an expanding diversity within the MSCI India IMI Index, where newer firms bring a diversified thematic focus. For global investors, this evolution highlights the necessity to recognize the increasing significance of small and mid-sized firms in capitalizing on India’s potential, particularly as they benefit from rewiring of supply chains and domestic consumption drivers, distinct from the traditional core companies with high quality and export orientation.
There’s a false narrative that ESG is a tax on investors when the evidence shows that it can deliver better risk-adjusted performance.
Given that ESG indices have become an integral part of market assessments, how do you anticipate broader political shifts, like those under the Trump administration, affecting your approach to ESG indices?
First of all, most investors focus on performance, and if you look at the broader index data, such as MSCI World, MSCI USA, and most of the other markets, ESG indexes have performed as well as, or even better, than the broader market. There’s a false narrative that ESG is a tax on investors when the evidence shows that it can deliver better risk-adjusted performance. This will continue to be a key focus across various markets.
The real-world impacts of issues such as climate change and energy transition affect every industry and community, so companies and investors continue to mobilize to address these real and present risks. Our clients— institutional investors around the world—remain focused on managing long-term financial risks and identifying growth opportunities in a rapidly changing world.
The issue is not going to go away. We remain committed to developing innovative research, data, models and analytical solutions that will help investors identify and evaluate financially material risks and opportunities linked to this transition.
How do you anticipate the flow of private capital into energy transition projects in both developed and emerging economies, with a particular focus on India?
Private investment in energy transition projects, particularly in India, remains relatively modest at this stage. However, I would be surprised if this doesn’t change over the next five years. We anticipate a significant influx of capital into various alternative energy solutions. While some of this investment will come from domestic sources, a substantial portion will also be from foreign capital. This remains an important opportunity for foreign institutional investors.
Most foreign portfolio investors tend to have a long-term perspective, although there is also some short-term capital that moves in and out of markets. That said, the broader trend is clear: India is poised to become an increasingly important part of foreign investors’ portfolios. The fundamentals are there so I expect this trend to continue and the focus and interest in India to increase over time.
Do you think that both developed and emerging markets are underestimating certain macroeconomic risks, which could potentially impact growth?
In developed markets, the key macroeconomic risk is largely centered around rising debt levels and increasing interest rates, particularly at the longer end of the curve, such as the US 10-year Treasury and similar rates in Europe. These higher rates can certainly lead to increased volatility in other dollar-denominated assets, which may impact global markets in the short term. However, despite the potential for near-term volatility, I believe this will not fundamentally alter the broader trends. Specifically, I see continued liberalization in US capital markets as a positive, which should, over time, benefit global investors.
When it comes to India, there’s a clear commitment from the government and regulators to attract private capital. What we see is that investments in India increasingly flow into a more diverse set of industries, beyond just traditional sectors. If this trend continues, say over the next five years, we are likely to see a broader diversification of capital flows into different areas. Investors must navigate these issues as part of the broader risk landscape.
Any plans for new indices? You were a trend setter with climate and ESG.
Throughout our 55-year history, we have proved that we can anticipate and meet the changing needs of markets and clients. As markets become more complex and the pace of change within them accelerates, we continue to look for ways to build on this legacy of innovation.
Private assets, for example, are becoming a larger share of institutional portfolios and we see increasing appetite among investors to allocate to private assets to achieve uncorrelated and differentiated returns. This, in turn, leads to the need for greater transparency and tools to help investors track their investments, support their strategic decisions, but also for more specialized tools in areas like pricing, liquidity, attribution, and risk.
With that in mind, we recently launched over 130 private capital indexes constructed from a broad universe of private capital funds with over $11 trillion in capitalization. Our aim is to leverage our robust methodologies and reputation for rigorously verified data to bring much-needed transparency to private markets investing.
