India surges toward leading position on EM benchmark
Mid and large stocks have highest PE ratio globally LSEG
Funds shy of buying deepen underweight allocation

SINGAPORE, Sept 5 Reuters India39;s stock market rally is ramping up its index weighting and creating a dilemma for global fund managers sit back and watch as their relative exposure shrinks while the market grows, or buy in at increasingly eyewatering prices.

Most find the latter uncomfortably risky and are seeking alternatives, some driving money into India39;s smaller companies, while others are looking elsewhere at other emerging markets.

The trend has been driven by years of strong earnings in India at the same time as China39;s markets have stumbled, upending their weightings in the MSCI Emerging Markets39; Index which serves as a benchmark for global EM funds.

India39;s MSCI EM weight has shot to 19, up from just 8 four years ago and analysts at Nuvama Alternative Quantitative Research expect it to top 22 by the end of this year. China39;s weighting over the same period has collapsed from 40 to 25, data from MSCI shows.

The convergence between India and China is causing problems for a lot of portfolio managers because if you had a global mandate or a panAsia mandate, you probably were at best equal weight India and probably underweight, said Vikas Pershad, portfolio manager for Asian equities at MG Investments.

And that underweight is growing.

Part of the reason for the longterm underweight has…