MSCIWhat is the impact of imbalanced weights on emerging market indices?

Data display,MSCI 63.5%。

Exchange traded funds that purchase stocks from global emerging markets(ETF)Investors may think they are gaining exposure to developing countries, but research shows that this is not the case.


On the contrary, most of their funds are being directed towards countries that many people see as developed and no longer "emerging", with most of their funds concentrated in only three economies.


Jinxin Capital, an investment bank focused on emerging markets(Renaissance Capital)The data shows that in the most widely used emerging market benchmarks——MSCIEmerging Market Index(MSCI Emerging Market Index)In China, Asia occupies a vast78.3%Of which only Chinese Mainland, Taiwan and South Korea accounted for63.5%。


The current situation and2008year6The month formed a sharp contrast, as it was at the peak of the commodity cycle and the global financial crisis had not yet erupted. Independent commentator Jeff•Dennis(Geoff Dennis)At that time, Brazil was in the above-mentionedMSCIThe maximum weight in the index is17.6%; And distributed on four continents - South America, Asia, Europe, and Africa - the largest7The sum of weights for each economy is78%。


He pointed out that the per capita gross domestic product of these two economies(GDP)——According to the International Monetary Fund(IMF)Data,2019Annual per capita in South KoreaGDPachieve31430 24827The US dollar - both higher than Portugal, which is considered a "developed" country, in the same year23030USD.


•Sault(Daniel Salter)"It depends on how you view these things, they are relatively safe, relatively high-tech economies that are relatively different from what many people see as emerging markets," he said


According to data from Jinxin Capital, China alone accounts for a significant portion of the index39.1%Previously, a single country had never held such a weight - the previous record was for South Korea to2002Created in the year24.2%。


The rise of China is astonishing.2006In the year, China only accounted for10%，2014Annual proportion20%。


Part of the reason for the increase in China's weight is due to,MSCIShares that have decided to start listing in Chinese Mainland (i.eAStocks are included in the index, while also being included in Baidu(Baidu)NetEase(NetEase)And Alibaba(Alibaba)Waiting for companies listed in Hong Kong and New York. But even though it was included in the listings in Shanghai and Shenzhen at the end of last yearAThese stocks still have a weight of only slightly over one tenth in China.


The increase in market value of Chinese companies listed in Hong Kong and the United States compared to other emerging market listed companies is a much more important factor.


The weight of China has increased significantly even since the outbreak of COVID-192020year6Within months, compared to the beginning of the year34.3%Rising4.8One percentage point. This is due toMSCIChina Index Rising in US Dollar Pricing2.8%And all other countries in the benchmark index have incurred losses.


Indeed, for trackingMSCI 1.7%and7.8%. The overall decline of the index10.2%Among them, India fell16.7%Russia's decline23.3%Brazil's decline37.3%。


Although investors have benefited overall from their huge exposure to East Asia, especially to China, this is not always the case.


"The current results are not bad." Salter said, "These economies responded to the COVID-19 epidemic without encountering any economic problems. But this does mean that other emerging market economies have been squeezed to one-third of the weight of the index."


Diversified investments, often described as the "only free lunch" in the investment field, do seem to have become a thing of the past. According to data from Jinxin Capital, Mexico's weight in the index has dropped to1.9%The historical low point is much lower than its1997Achieved annually13.2%. Indonesia is only1.6%, from2009The lowest level since the beginning of the year. Brazil is5.1%, slightly higher than this year4The historical low set by the month, but still related to2010Over the years16%The levels vary greatly. South Africa, which once easily reached double digits in weight, has now fallen to3.8%。


The weight of Türkiye, Hungary, Argentina, Peru and Colombia in the index has shrunk to0.2%to0.4%, which means they are related to tracking thisMSCIThe return rate of passive funds in the index is basically independent. Pakistan is even more miserable, currently only occupying a small portion0.02%。


Dennis said, "This emerging market index does not represent developing or emerging economies very well, and investors tracking it have gained too much Asia."


This issue is unique to the stock market. At JPMorgan Chase(JPMorgan)Widely tracked global diversification index of hard currency sovereign debt in emerging markets(EMBI Global Diversified index)In China, the weight of Asia is only18.7%。


Asia's JPMorgan Chase Global Emerging Market Diversified Bond Index denominated in local currency(GBI-EM Global Diversified Index)The weight of the middle is relatively high, which is28.9%In the diversification index of emerging market corporate bonds denominated in hard currency(CEMBI Broad Diversified Index)A higher proportion, for39.4%But still related to the aboveMSCIThe extreme levels of benchmark indices vary greatly.


MSCISebastian, Global Head of Stock Solutions•Liblich(Sebastien Lieblich)In a statement, investors "have the freedom to choose which indices to use for what purpose based on their most suitable investment expectations, goals, and constraints."MSCIWe should not provide advice on which index to use for clients, nor should we provide advice on investing in tools to track their index.


He added that,MSCIThe index construction method is completely transparent, rule-based, and publicly available, and any changes require consultation.


Federated HermesGary, Head of Emerging Markets•Greenberg(Gary Greenberg)Currently centered around AsiaMSCIThe composition of the index has both advantages and disadvantages.


He believes that from a positive perspective, the development of Asia's weight in the index is the result of population size, economic models, and wise policies.


However, the downside is that investors are missing out on potential opportunities. Greenberg said that the sell-off of stock markets and currencies in Indonesia, Mexico, Brazil, Peru, "possibly" and Türkiye this year created a "dramatic opportunity" for active fund managers who did not pay attention to the benchmark, while funds closely linked to the index were basically not prepared for such a choice.