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The transformation of emerging markets has been remarkable. The countries and companies that dominated 20 years ago have changed dramatically, influenced by the major geopolitical, economic and demographic changes that have taken place over this time. Navigating these changes can be complex, but these developments underline the importance of taking a flexible, active approach and investing in the most attractive opportunities.
Emerging markets EM encapsulate a broad range of countries across different geographies. In simple terms, these are generally perceived to be a group of countries with strong potential economic growth and in turn stronger investment returns, albeit subject to greater political, legal, counterparty and operational risk.
This is typically underpinned by an expanding middle class and rising wealth, as well as positive demographics and savings trends. When it comes to investing, major index providers consider a range of factors when determining their definition of an EM.
In addition to economic metrics such as GDP per capita, significant emphasis is also placed on market access. The relevance of emerging markets continues to rise As the chart below illustrates, the relevance of emerging markets shares to investors has increased significantly over the past 20 years.
It should of course be noted that this data immediately follows the Russian financial crisis in August and the Asian financial crisis inwhich had depressed EM asset values somewhat. Historical trends are not indicative of future trends. However, a good active manager will often look beyond the companies in this index to identify opportunities.
Nonetheless, the index provides a good gauge of the opportunity set. As at the end of September the index comprises 24 emerging markets countries. At the other end of the scale, Pakistan, which was reclassified from frontier markets inis the smallest index market with a weight of less than 0.
Frontier markets are typically less mature than EM on a range of metrics, including market size, liquidity the ease of buying and selling stocksforeign investor access and economic development.
The precise definition varies by index provider. Viewed from a sector perspective, financials and IT are clearly the dominant sectors with respective weights of By contrast, utilities, real estate and health care are the smallest index sectors with a share of 2. Index country changes over time Within EM in particular, a review of index country changes can be illustrative in tracking the evolution of EM over the past 20 years.
The chart below provides a snapshot of index country weights at three points in time, the end of Septemberand Unsurprisingly, the most striking feature is the colossal rise of China from a weight of just 0.
The main driver of this transformation is the addition of Chinese companies to the index; China has performed broadly in line with the MSCI Emerging Markets Index over the past 20 years.
This was initially through greater inclusion of Hong Kong-listed companies.
But mainland Chinese companies, known as China-A Shares, were not officially considered for inclusion until This is one of the largest stock markets in the world and includes over three thousand companies.
Regulation rendered market accessibility unequal and also limited capital mobility. Over time, however, the authorities sought to liberalise and address investor concerns. It is likely that more of these stocks are included over time.
South Korea has also seen its weight in the index rise markedly, from 5. In part due to the rise of China, markets such as Mexico, Brazil and South Africa have seen their significance in the index moderate.
Meanwhile Russia, which had a weight of 0. These fluctuations reflect an initial recovery in the economy, crude oil price movements and later, the rise in geopolitical tensions, with the US and European Union implementing sanctions on the country.
Other countries meanwhile have exited the index altogether. The case of Venezuela highlights the importance of market access in determining EM status. It was subsequently taken back to emerging markets status inpost the government-debt crisis.
Index sector changes over time From a sector standpoint there have also been significant shifts, as indicated in the below chart.
The emergence and expansion of the internet and subsequently smartphones were major drivers of this shift. It also correlates with the rise in the significance of Asian markets.3 days ago · Being a great place to work for our employees The company’s ability to deliver strong results and drive responsible growth directly depends on .
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When the global financial crisis tsunami ended, emerging market banks temporarily washed up on calmer shores. But a tidal wave of changes—from re-energized global players to local consolidation—is now hitting many financial institutions in the developing world.
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As the chart shows, since 31 August emerging market stocks are down %, world stocks have fallen % and US stocks and European shares are down % and % respectively. The best-performing index of those highlighted below is Japan's Nikkei , which is down %.