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E M E R G I N G
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W
hat is an emerging market? The term
after all suggests an economy in transi-
tion from one state to another, but the
divisions between developed, emerging and frontier
markets by those who use them to create investable
indices have seen remarkably little movement of
individual countries from one category to another.
Organisations such as MSCI, S&P and FTSE Russell
all have solid metrics behind their rankings. The
MSCI Emerging Markets Index, perhaps the best
known in the investment world, represents the
performance of large- and mid-cap securities in 24
Emerging Markets. It is built using MSCI’s Global In-
vestable Market Index (GIMI) methodology, which
is designed to take into account variations reflecting
“As these markets are moving through the stages of
maturity, we also expect an increase in efficiency
and product availability.”
MARGARET HARWOOD JONES, GLOBAL HEAD OF
SECURITIES SERVICES, STANDARD CHARTERED
conditions across regions, market-cap segments, sec-
tors and styles. As of March 2018, it had more than
830 constituents and covered approximately 85% of
the free float-adjusted market cap in each constitu-
ent country.
The MSCI Market Classification Framework in-
volves three broad criteria: economic development,
size and liquidity as well as market accessibility. In
order to be classified in a given investment universe,
a country must meet a specific set of requirements in
all three criteria. Market accessibility, for example,
aims to reflect international investors’ experience in
investing in a given market.
Indices such as those produced by MSCI are used
by professional investors for investment analysis,
performance measurement, asset allocation, hedging
and the creation of a wide range of index derivatives,
funds, ETFs and structured products.
For Charl Bruyns, head of investor services at
Standard Bank Group, headquartered in South
Africa, a distinction can be made between markets as
investment destinations and the operational frame-
work and infrastructure of the markets. These do not
always coincide, he suggests.
Some of the distinction has to do with the nature
of purchasing decisions. “The way I look at it, clients
really buy the exposure they want,” says Bruyns.
Some investors, for example, buy according to the
MSCI indices and then allocate their money accord-
ing to the weightings in the index concerned.
Depending on the nature and structure of a fund,
asset managers may pay greater or lesser attention to
each of the individual index criteria. “We don’t look
at the index to determine what our portfolio weights
will be,” says Mark Mobius, co-founder, Mobius
32
Global Custodian
Winter 2018
Capital Partners and a renowned emerging markets
investor of long standing. “Of course, when looking at
investments we consider liquidity, but our emphasis
is on small- and medium-size firms that don’t appear
on the index necessarily.” It’s all about value and
growth, Mobius adds. “We look for companies that
have a strong balance sheet, pay dividends and have
good prospects for earnings growth.”
Do banks and investment managers share the same
concepts of risk? In buying services, for example,
banks and broker dealers will often look for solu-
tions through corridors and regions. When it comes
to custody for example, broker dealers seeking high
volume opportunities will come through a corridor
to access those opportunities, while an investment
manager wanting exposure on a portfolio is more
likely to look at distinctions between market classifi-
cations according to an index provider.
A global custodian looking for service providers
in a region may be looking at operational criteria
that are not reflected in the indices. Bruyns takes
the example of South Africa itself. “From a market
maturity perspective, it’s up there with the top inter-
national markets,” he points out, “It might be seen as
an emerging market because of its fundamentals, but
not from the perspective of capability or operations.
There are many lenses that you can use.”
In addition, says Bruyns, if you look at the size of
the market versus GDP, South Africa is relatively
mature. “In start-up markets, GDP is really driven by
other areas of growth,” he says. “A large contribution
from financial markets suggests a mature market.”
For these reasons, Bruyns is sceptical of the decision
by Global Custodian magazine in 2018 to move South
Africa from its major markets to its emerging mar-
kets agent bank survey.
Margaret Harwood Jones, global head of securi-
ties services at Standard Chartered, makes a similar
distinction between investment and operational
services, though, she says, “The distinction is still
very relevant to many of our clients as these classifi-
cations are used as the backbone of their investment
appetite, suitability and strategies.”
As a custodian in many emerging and frontier
markets, she notes, “There is direct – almost me-
chanical – correlation between transactions volume
spikes and indices re-balancing. The intensity of
these peaks can be quite extensive when a low vol-
ume / low assets-under-custody frontier market is
re-classified as an emerging market, such as last year
Pakistan’s upgrade into the MSCI emerging market
index. “
At the same time, the nuances and boundaries be-
tween emerging and frontier markets are becoming
a little less prevalent from a post-trade perspective,
she says: “We are observing an increased trend in
advocacy for more alignment of local practices with
global standards at securities market infrastructures
(“SMI”) such as Central Securities Depository and