The MSCI Emerging Markets Index is a benchmark index commonly used by funds. For the past two decades, emerging market stocks has greatly outperformed the developed markets. The total return on the MSCI Emerging Markets Index and the MSCI World Index (which includes developed countries only) are 442.19% and 163.86%, respectively.
Weights of Asian countries are getting higher and higher
Currently, the MSCI Emerging Markets Index covers 24 emerging countries with 1,150 constituents. The top 10 constituents consist of 23.48% of the index. As of the end of November 2018, the weights of China, South Korea and Taiwan are 30.99%, 13.87% and 11.31% respectively, accounting for 56.17% of the index totally. However, the weights are not static. Twenty years ago, the index mainly focused on South American, but now its concentration shifts to the East, especially China (see Figure 1). The share of China in the index has risen from 0.8% in 1998 to over 30% today. No wonder there are comments that the Asian region dominates the MSCI Emerging Markets Index.
Figure 1: Country weights in the MSCI Emerging Markets Index
As the importance of emerging markets increases in the global economy, the weights of the emerging markets go up from 4% in 1998 to now 11% in the MSCI AC World Index (see Figure 2). However, this percentage does not fully reflect the share of emerging markets on the world economy. According to IMF data, in terms of nominal GDP, emerging countries account for 45% of global GDP. The reason for such a big difference is that the financial systems of many emerging countries are still immature. However, we believe that as their financials system become mature and capital markets open up, the weights of emerging market equities in the MSCI AC World Index will increase again.
Figure 2: The share of the MSCI Emerging Markets in the MSCI AC World Index
Affected by Sino-US trade disputes and strong US dollars, the MSCI Emerging Markets Index fell 16.64% in 2018, the worst performance since 2015. The market expects that the US Federal Reserve will slow down the pace of rate hike in 2019. This will ease the pressure on emerging countries’ currencies. The Bloomberg estimated price-earnings ratio for the MSCI Emerging Markets Index is close to the 2016 low (see Figure 3). This relatively low valuation is worth your attention.
Figure 3: The Bloomberg estimated price-earnings ratio for the MSCI Emerging Markets Index from 2009 to 2018
Source: Noble Apex Advisors Ltd. / iFund; Bloomberg