MSCI wears many hats – one of which is operating the well-known MSCI Emerging Markets Index. MSCI (otherwise known as Morgan Stanley Capital International) is an investment firm that provides various investment tools and analytics such as stock indices, risk and performance analytics and governance tools. What it is most well known for are its benchmark indices such as the MSCI Frontier Markets Index and MSCI Developed Markets Index, in addition to the MSCI Emerging Markets Index. All of its indices are market cap-weighted indices, which means that the stocks included are weighted according to their market capitalization.
If you are investing in UAE or other MENA-based stocks or overall stock markets, MSCI Emerging Markets is something important to know about. Some unique features of the index include:
In addition to MENA countries United Arab Emirates, Egypt and Saudi Arabia, the index also includes stocks from Argentina, Brazil, Chile, China, Colombia, Czech Republic, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Russia, South Africa and Taiwan.
The index is heavily weighted with China-based stocks at 31.55% of the index, and South Korean stocks in second place holding 12.37% of the share. Some of the well-known stocks included in the index are: Alibaba (NYSE:BABA), Tencent (NYSE:TME), Samsung (KRX:005930), Naspers (JSE:NPN), Reliance (NSE:Reliance) and JD.com (HKG:9618).
The index is reviewed four times a year and is rebalanced twice a year in May and November.
The UAE was included in the MSCI Emerging Markets Index in 2013, after it was upgraded from frontier market status. After the country was included, it saw an unparalleled injection of capital from international investors into many of its stocks, and continues to see this as the index evolves with new stock additions. For example, in early 2020, 100 million shares of Emirates NBD were purchased by 254 investors just before its inclusion into the index.
In 2018, MSCI upgraded Saudi Arabia from a standalone market to emerging market, and began phasing Saudi stocks into the index in two tranches with a 50% inclusion factor for each; the first inclusion in May 2018 and the second in August 2019. In 2019, after inclusion was complete, the index generated billions of dollars of foreign inflows and has helped the Saudi index make double-digit gains.
A country being included in the index could see an increase in capital to local equity markets and liquidity of domestic stocks due to international investments that weren’t accessible before.
This is beneficial to developing countries as the increase in foreign inflows can lead to local stocks having more visibility to foreign investors and greater liquidity overall for the country.
While there are plenty of advantages for a country to be included in the MSCI Emerging Markets Index, there can also be some disadvantages. One disadvantage is the possibility of a sell off that could happen if a natural disaster or catastrophe happens in another country that is included in the index. This could lead to adverse trading activity in emerging market Exchange Traded Funds (ETFs) that might affect all countries in the index and their respective equity markets.
As always, research is your friend. Take an overall holistic view on your portfolio and what type of risk you are willing to take on before investing. Emerging markets may be a riskier investment as you might see volatile returns. But, if you are looking to diversify, it’s one to consider. There are various ways to invest in these markets, starting with what’s the most popular – ETFs.
Blackrock alone operates 18 ETFs that track MSCI Emerging Markets. The combined assets under management exceed $44 billion and average daily trading volume exceeds $3 billion of iShares Emerging Market ETFs. Compare this with iShares Frontier Markets ETF which sees only $825 million assets under management and $11 million daily trading volume.
ETFs are well known to offer an option for diversification and will (almost perfectly) track the MSCI indices that it follows. Investing in an ETF that tracks the emerging markets can be a good way to get ownership of international stocks that may otherwise not be available to you.