In the 20 months from 1 January 2021 through 12 August 2022, MSCI India gained almost 18.5%, while MSCI EM lost 21%, Bloomberg data showed. The India index not merely outperformed the EM index, a routine occurrence, but has clocked a gain while the other slipped, marking a negative correlation. A negative correlation is when two indices or stocks move in opposite directions over the same period, while a positive correlation refers to them moving in the same direction.

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While the MSCI India index rose 26.66% in 2021, MSCI EM fell 2.22%. This year, till 12 August, MSCI India has fallen only 5.07% against a sharper decline in MSCI EM at 17.5%.

It would be unprecedented if the India index outperformed the EM index for the rest of the year as well, making it a two-year stretch, said Nilesh Shah, managing director, Kotak Asset Management Co.

“In July, foreign investors who began investing in trickles after nine months of selling a whopping $34 billion worth of domestic shares saw that India was up 9% while China was down 10%, a 19% outperformance. They realized in hindsight that they had booked profits only to invest in loss-making destinations. India, which is in a sweet spot compared to Russia, China, Brazil, South Korea or Taiwan, is a more attractive bet for the long term, and this could result in a revival of flows,” Shah said.

FII flows have already crossed $2.8 billion in August, up from just $600 million in July. Along with domestic inflows, this has enabled the benchmark Nifty to recover 17.5% from June lows and just a little over 4% down from its 19 October 2021 record high of 18,604.

“If FII inflows continue the way they have been, we could well be headed for a new high, and that means MSCI India will be a potential outperformer to the MSCI EM for two years running,” said Rajesh Palviya, vice-president (research), Axis Securities.

China, South Korea and Taiwan comprise almost half of MSCI EM. According to a wealth manager, who spoke on the condition of anonymity, geopolitical tensions in these areas have helped India outperform, even as inflation in oil and metals has tapered, thanks to monetary tightening in the US. India, a consumption-driven economy, benefits from low commodity prices, unlike exporters like China and South Korea, and domestic stocks could continue their outperformance.

Top stocks in MSCI India include Reliance Industries, Infosys, ICICI Bank and Housing Development Finance Corp. Taiwan Semiconductor Manufacturing, China’s Tencent Holdings and South Korea’s Samsung Electronics are among the three top stocks in the MSCI EM index.

The MSCI India index, part of the MSCI Emerging Markets index, has not just outperformed the latter, normally the trend since its launch in 1993, but has been inversely correlated with it for the longest period in seven years.

“The extended stretch of negative correlation signals that either the EM index should rise or the India index should fall to restore the positive correlation between the two over the next few quarters,” said Dharmesh N. Vala, director, Nayan M. Vala Securities.

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