Is the MSCI EM Index still an emerging markets index?

**SPEAKER_1** (0:01)
Hello folks, you're tuned in to Finshots Daily. In today's episode, we explain what India's fall in the MSCI Emerging Markets Index reveals about the benchmark itself.
Before we begin, here's a quick word from Team Ditto.
Life can be unpredictable, and if the main earner is not around, the bills won't stop. That's why term insurance is so important. It gives your family a fixed payout, so they can cover school fees, EMIs and daily expenses without stress. If you buy it early, you can get a one-crore cover for as little as 1000 rupees a month, and the premium stays the same for your entire policy term. That's real peace of mind at a very small cost. And if you're not sure which plan is right for you, book a free call with Ditto. No spam, just honest guidance. And we're trusted by over 8 lakh people for their health and term insurance needs.
Now, back to the story.
Imagine you're a global fund manager sitting in New York. Your job is to invest in emerging markets like India, China, Brazil, South Korea, Taiwan, and other large emerging markets. You pick the traditional route and avoid individual stocks. Instead, you just buy the index, specifically the MSCI Emerging Markets Index, that is MSCI EM Index, one of the most widely tracked benchmarks in global investing. Now, here's the thing about MSCI Index Investing. It decides how much goes into India or China based on one simple thing, a free-flowed adjusted market capitalization. In simple words, the companies with the largest market value gets the highest weights in the index, which is why what happened this week is so interesting. For the first time since at least 2000, not a single Indian company featured among the top 10 constituents of the MSCI EM Index. HTC Bank and Reliance Industries have slipped to 11th and 12th place from 7th and 8th as recently as March, and their individual weights have both fallen below 0.8%.
So what exactly happened? Now the obvious assumption is that Indian stocks underperformed. While that is true, the biggest story is that Taiwan and South Korea have risen much faster, and the top 10 companies in the MSCI EM Index are now dominated almost entirely by AI and semiconductor-related stocks.
TSMC, Samsung, SK Hynix, and Tencent alone account for 30% of the entire benchmark. Add in a few more Chinese tech companies, and roughly 70% of the index is dominated by Taiwan, South Korea, and China. And that's where the top is being a story about India. If you bought an EM index fund this year, thinking you were getting broad exposure to developed economies, you were really just getting a large bet on the global semiconductor supply chain. And it's not hard to see why. Every AI model, data center, and LLM runs on chips. TSMC builds most of the world's advanced processors and Samsung and SK Hynix supply components that power them. So naturally India, which has no real presence in that supply chain, got left on the sidelines. You can see that in the numbers. The MSCI EM index has returned over 25% in just the first 5 months of 2026 India's NIFTY over the same period is down 11%.
So India's weight in the index hasn't just suffered from its own stock falling. It's also suffered from everything else rising faster. The result is that India's share of the MSCI EM index has dropped to 10.8%, which is a 6 year low and roughly half the weight it held in 2024
Because as you probably know, foreign portfolio investors or FPIs have pulled nearly 2.8 lakh raw rupees out of Indian equities this year, on top of 1.66 lakh raw rupees of outflow last year.
Some of that is deliberate selling. The same effect plays out in actively managed EM funds too, just more quietly. Since fund managers benchmark themselves against the MSCI EM index, when India's weight falls because of its overall market capitalization, fund managers don't have to own as much of it anymore. That means even investors who are positive on India can end up owning less of it. But none of this is really India's fault. Surely, India doesn't have a TSMC, Samsung or SK Hynix, it's still catching up in the technologies that have captured global investors' attention. But India's large cap stocks have had their own challenges. The bigger work, the bigger force at work is that the MSCI EM index has become heavily concentrated in a single theme, which also raises a more uncomfortable question. Is the MSCI EM index still a useful benchmark for diversifying into emerging markets? Maybe it is still useful for something, because maybe that something is no longer broad emerging market diversification. At today's weights, the MSCI EM index may be a useful benchmark for Asian technology, AI hardware and semiconductor supply chain exposure. But that is a very different product from what the label suggests. Because right now, the risk profile of the MSCI EM index is much more tied to the global AI capex cycle than many investors probably realize. If the AI spending boom continues, the benchmark can keep looking brilliant. But if that cycle cools, an emerging market investor could take a hit for reasons that have little to do with emerging market consumers, commodity demand, or domestic growth. Another point is that the issue might not be that the MSCI emerging markets index no longer looks like an emerging markets index. After all, the term was coined in the 1980s to describe economies that were still catching up to the developed world. The assumption was that these countries shared certain characteristics like faster growth, less mature capital markets, high risk, and lower income levels. Investors still talk about emerging markets as if they are buying exposure to a single economic story. But Taiwan's role in the global semiconductor industry has very little in common with India's consumption story, Brazil's commodity cycle, or Saudi Arabia's capital spending plans. The category lumps together countries that increasingly occupy very different positions in the global economy. South Korea is the perfect example. It remains in MSCI's emerging markets bucket even though its companies sit at the center of the global AI supply chain, and that classification may not last forever. In fact, there's more than 60% probability that South Korea will be added to MSCI's developed markets watch list this month. If that happens, it would only make the contradiction sharper. One of the most important emerging market drivers of 2026 may be on the part to leaving emerging markets altogether, which means the MSCI EM index may not be falling at all. It may simply be reflecting a world in which some emerging markets have already emerged. And if that's true, then India's disappearance from the top 10 tells us something bigger than who won or lost this year's market race. It tells us that the line between developed and emerging may be becoming harder to draw than investors realize. For now, India is out of the top 10, but the biggest story isn't who left the list, it's what's taking over the benchmark. Alright folks, I'll see you in the next one.