India loses out in Morgan’s new strategy

Although some funds have already shifted investments following pre-announcements of Malaysia’s re-inclusion and Taiwan’s upgrade in the benchmark Emerging Markets Free index, the changes have the potential to alter capital flows. "Most of the mandates that we win involve a benchmark, so we will be changing our portfolio," said Ed Baker, who runs Alliance Capital’s global emerging markets funds. This means while other Asian countries will get higher fund inflows, foreign investments in India may come down.

Malaysia, which imposed capital controls in the wake of the Asian financial crisis and has now removed them, will be re-included in the index, Taiwan starts its climb to 100 per cent weighting and China will gain recognition in its own right in an index which is used by 60 per cent of global emerging market funds.

Based on end-March valuations, Merrill Lynch emerging market strategist Janet Krengel said the market capitalisation of Asian stocks captured in the EMF will rise by $205 billion from $820 billion, to account for 49 percent of the index versus 40 percent at present.

Weightings for Latin America will fall to 25 percent from 29.5 per cent and Emerging Europe, Middle East and Africa will fall to 26 per cent from 31 per cent. "The overall weighting for Asia goes up, the implications are negative for Latin America and Emerging Europe, Middle East and Africa," said Janet Krengel, emerging equity strategist at Merrill Lynch.

One of the biggest changes in market weightings will be China’s, which will increase from 0.4 percent to 3.3 percent of the Emerging Markets Free Index, with the likely inclusion of some 15 red chip stocks currently counted in Hong Kong indices because of their listing there, said Tim Love, global emerging markets strategist at SG Securities.

Latin America is suffering from a process of shrinking bourses as mergers in the telecommunications industry shrink the numbers of companies in which investors can hold stock. Spain’s Telefonica has announced the purchase of companies in Argentina, Brazil and Peru, which will reduce the capitalisation of the Argentine and Peruvian markets some by $6.5 billion and $3 billion respectively according to HSBC global emerging markets strategist Benn Rudd.

"Peru would join into the bottom five in terms of market capitalisation, joining Pakistan, Colombia, Jordan and Sri Lanka; whilst Argentina would slip from 13th to 16th largest below Poland, Hungary and Indonesia," Rudd said. This means that these markets will fall from the view of large foreign institutions and flows will be reduced.

The fact that the companies de-listing are telecoms, thevery sector which will drive growth, is also a negative, Rudd said. Merrill’s Krengel noted although there are companies listing from the new industries, these were not yet established.

May 31 will not mark the end of index changes, MSCI and the rival International Finance Corp Indexes are also considering when Greece will graduate to developed market status as it joins European Monetary Union. Rudd at HSBC believes that following the example of Portugal, MSCI will graduate Greece before it joins the euro zone.

Replacing Greece will be Egypt and Morocco, which will be positive for both of those markets. In the IFC Investable Index, which covers 30 countries as opposed to MSCI’s 24, November will see Greece graduate. Turkish stock offerings will result in a$12.5 billion increase in its market capitalisation, which will result in its weight rising to 7.87 percent from 6.25 percent, said SG’s Love.

After these events, Asia will remain the largest region in the IFC, rising to 44.6 percent from 42.4 percent and Latin America to 28.7 per cent from 27.3 per cent. Looking further out for both indices, Israel is an almost certainty for graduation once its Nasdaq-listed stocks are listed locally as well, Taiwan will graduate after entry to the World Trade Organisation and South Korea should meet economic criteria in two years, while Mexico has moved to the IFC’s graduation list.