SINGAPORE (Nov 15): The dynamism and structural growth story of emerging market (EM) equities may play a crucial role in helping investors meet their goals, according to a recent report by Schroder Investment Management (Singapore).

In the view of Schroders investment writer Andrew Rymer, the widely-followed MSCI Emerging Markets Index, which comprises 24 emerging market (EM) countries, provides a good gauge of the opportunity set available to global investors.

Based on weightage alone, the most striking feature of Index country changes over the past 20 years is no doubt China, which has risen from a weight of just 0.8% in 1998 to 31% today post the inclusion of China A-shares in the EM Index.

“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… But mainland Chinese companies, known as China A shares, were not officially considered for inclusion until 2014. This is one of the largest stock markets in the world and includes over three thousand companies,” says Rymer in a November 2018 report.

Another significant shift is the major increase in the IT sector’s market share, which accounted for just 5% of the Index two decades ago but is now close to 27%.

Rymer attributes this trend to the emergence and expansion of the Internet and subsequently, smartphones, which correlated with the rise in the significance of Asian markets as the region became dominant as a manufacturing hub for technology companies.  

China again saw a marked rise in home-grown Internet and gaming companies as did South Korea, which also saw its weight in the Index rise markedly from 5.5% in 1998 to 9.4% today.

By reviewing the top 10 stocks at the same snapshots in time, Schroders has also uncovered an evident regional shift at the country level, where seven out of the top 10 stocks were all based in Latin America back in 1998 – whereas all top 10 stocks today are effectively in Asia.

It is also noted that the top 10 stocks presently represent a significantly higher proportion of the Index at 24%, as compared to  16.7% and 21.3% in 1998 and 2008, respectively.

Going forward, Rymer highlights the possibility of China’s share of the Index to rise further on the further consolidation of A shares in addition to a range of other Chinese companies such as P-Chips, i.e. non-government owned companies incorporated outside of China.

There is also the prospect of certain markets such as South Korea being upgraded to developed markets status, he adds.

“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,” says Rymer.

“This point is often underappreciated, but it is important as it captures investors’ ability to put their money to work, as well as the ease of divesting in the future.”