Keep an eye on these large caps

Last week, a post by Morgan Stanley noted that the firm believes the world is entering a regime of emerging market (EM) outperformance, as these markets have lagged developed markets equities since the financial crisis 122% to 197%. The post favoured EM Asian countries over EM Europe, Middle East and Africa (EMEA) and Latin America. As for countries, the favourites were India, China, South Korea, Taiwan and Mexico.

Later, a report by Morgan Stanley's Ridham Desai and Sheela Rathi made some interesting observations.

• India's weight in the MSCI EM index should rise in the coming years. While India ranks among the top 3 in the EM basket in terms of GDP, it barely makes it into the top 15 in terms of index weight. As India index weight rises, it will probably attract more non-long-term money. Such 'tourist flows' will mostly look for large cap, liquid names.

• Morgan Stanley expects equity savings to double to 1.4% of GDP by FY2026. The heavy lifting for this super liquidity cycle is likely to be borne by domestic mutual funds whose assets could catapult to $1 trillion in the coming decade (from $100 billion currently). Historically, mutual funds have allocated 40-50% of their funds to mid- and small-cap stocks helping them outperform the benchmarks. But their growing size will make it difficult for them to continue the outperformance by buying just mid caps.

• Rising provident fund flows to domestic ETFs would also contribute to the above factor. Allocation to equity investments by provident funds has risen from 5% in 2015 to 10% in 2016, and 15% in 2017. It could even go up to 20%.

• The growing size of domestic mutual funds implies that they may not be able to repeat their historical excess returns by buying a handful of mid- and small-cap stocks.

1. Bajaj Auto
2. BPCL
3. HDFC Bank
4. IndusInd Bank
5. Infosys
6. M&M
7. Maruti Suzuki India

1. Cummins India
2. JSW Steel
3. Lupin
4. M&M Financial
5. Petronet LNG
6. Zee Entertainment