News and views

Emerged or Emerging

We appreciate that investors and clients are probably more concerned about market direction and peaks in infection rates than asset allocation at the moment, but we have seen a number of pieces about emerging market equities – concerns and opportunities.  For this weekly update, we thought we’d dispel or try to dispel a myth and get a greater focus on the ‘EM’ landscape.

Inappropriate labels

Regular readers will know our dislike for market-capitalisation indices and for inappropriate labels, but for the index-junkies out there (mostly, but sadly not limited to institutional investors), the MSCI Emerging Market Index is constructed as follows*:

 

*The latest country weights are taken from the iShares ETF that tracks the MSCI Emerging Markets Equity Index

The Asian component of the above index is 77.5%, there will be others within the ‘others’ too.  So over three-quarters of the index is in Asia, whether you think the rest of the index (less than a quarter) will offer significant opportunity in a post-virus world, is your call but it might be a marginal one.  Another key element of the index is the dominance of the North Asian countries as China, South Korea and Taiwan represent 64.5% of the index.  For those looking at recovering economies, you might be tempted by those that dealt with Covid-19 first or most efficiently.  That is likely to involve China as the coronavirus started there, but it might also involve South Korea.

It is arguable whether the ‘emerging markets’ label is a flag of convenience.  It is also arguable that while those three North Asian countries meet the MSCI emerging market country classification, you could also say that they have emerged, after all, as we have pointed out before, Samsung is technically an emerging market stock but few investors view it as such.

Ambivalence

For us at TBAM, we eschew the above classifications from indices and labels.  We don’t follow the general investor template, which is to allocate equity assets geographically and source higher economic growth rates through an allocation to emerging markets.  This is illogical when investing thematically gives investors access to long-term drivers of returns irrespective of geography.

In fact, you could also argue that it is more relevant to understand the origins of company revenues than their domiciles – we aim to.  The challenge going forward is to identify and allocate more assets to the themes that will be the beneficiaries in a post-Covid-19 world. As supply chains are given greater scrutiny, the relationship between a company’s domicile and its marketplaces will gain greater importance.  We’re on the case as the company winners going forward may not be the same as those who were successful previously.

We hope you are in good mental and physical health as we experience difficult and unusual times.  Please get in touch with us at TBAM if you have any questions or would like a catch up.