Emerging Capital Markets AG907 M.Sc. Investment & Finance M.Sc. International Banking & Finance Lecture 1 Defining & Characterizing Emerging Capital Markets Ignacio Requejo Glasgow, 2010/2011
Overview of Lecture 1. Introduction 2. Definition of Emerging Markets 3. About the Indices 4. Characteristics of Emerging Markets 1
1. Introduction Emerging financial markets Several definitions Importance of emerging capital markets No clear guidelines for valuation of assets & securities in emerging markets Different from developed markets: transparency, governance, liquidity, volatility, transaction costs, etc. Increasing investment flows to emerging markets Faster rate of economic growth 2
2. Definition of Emerging Markets Tier of economies below developed economies S&P/IFC indices Emerging markets should meet one of the following two criteria Low-, lower-middle, or upper-middle income economy as defined by World Bank (World Bank s main classification criterion GNI per capita) Low investable market capitalisation relative to most recent GDP figures 3
2. Definition of Emerging Markets S&P/IFC indices Developed markets should meet both of the following conditions GNI per capita exceeds the World Bank s upper-middle income threshold for at least three consecutive years Investable market capitalization to GDP in the top 25 percent of the emerging market universe for three consecutive years S&P/IFC indices use other criteria to categorise countries into developed, emerging, frontier & unclassified markets 4
3. About the indices S&P Global BMI covers approximately 10,000 companies in 45 countries MSCI ACWI IMI covers over 9,000 securities in 45 countries In both cases all 45 countries are classified as either developed or emerging 5
S&P Emerging BMI S&P Global BMI covers approximately 10,000 companies in 45 countries All listed stocks at least US$ 100 million in float adjusted market capitalization & value traded of at least US$ 50 million for last 12-months 45 constituent countries classified as developed or emerging S&P Developed BMI and S&P Emerging BMI 6
S&P Global BMI: Countries S&P Developed BMI North America: CAN, USA Europe: AUS, BEL, DEN, FIN, FRA, GER, GRE, IRE, ITA, LUX, NET, NOR, POR, SPA, SWE, SWI, UK Asia Pacific: AUS, HK, JAP, NZ, SIN, SK Middle East & Africa: ISR S&P Emerging BMI Latin America: BRA, CHILE, MEX, PER Europe: CR, HUN, POL, RUS, TUR Asia Pacific: CHI, INDI, INDO, MAL, PHI, TAIW, THAI Middle East & Africa: EGY, MOR, SA 7
S&P Global BMI 8
S&P IFCI Liquid and investable subset of S&P Emerging Plus BMI S&P Emerging BMI plus South Korea Company eligibility criteria a stock must have floatadjusted market capitalization of US$ 200 million or greater (constituents that fall below US$ 200 million but remain above US$ 150 million remain in the index) 9
S&P IFCI 10
S&P Emerging BMI vs. S&P IFCI S&P Emerging BMI S&P IFCI 11
S&P Frontier Indices Equity markets with less liquid stocks from lesser known emerging markets Include S&P Frontier BMI, S&P Extended Frontier 150 and S&P Select Frontier S&P Frontier BMI measures performance of 37 relatively small & illiquid markets (individual country indices include all publicly listed equities representing at least 80% of market capitalization in each market) 12
S&P Frontier BMI Country coverage Index portfolio characteristics 13
MSCI Developed Markets Indices Country coverage The MSCI World Index covers over 6,000 securities in 24 developed markets countries, spanning large, mid, small and micro cap securities which can be segmented across styles and sectors 14
MSCI Emerging Markets Indices Country coverage The MSCI Emerging Markets Indices cover over 2,600 securities in 21 markets currently classified as EM countries spanning large, mid and small cap securities and can be segmented across styles and sectors 15
MSCI Frontier Markets Indices Country coverage The MSCI Frontier Markets Indices include 31 countries taking investability requirements into consideration within each market and comprising large, mid and small cap representation 16
MSCI International Equity Indices (Country & Market Coverage) 17
MSCI ACWI IMI Index 18
MSCI Indices Evolution Country Indices Market Reclassification Date* MSCI Israel Index From Emerging to Developed Markets May 2010 MSCI Bangladesh Index From Standalone to Frontier Markets May 2010 MSCI Argentina Index From Emerging to Frontier Markets May 2009 MSCI Pakistan Index** From Standalone to Frontier Markets May 2009 MSCI Trinidad & Tobago Index From Standalone to Frontier Markets May 2009 MSCI Jordan Index From Emerging to Frontier Markets November 2008 MSCI Lithuania Index From Standalone to Frontier Markets November 2008 MSCI Serbia Index From Standalone to Frontier Markets November 2008 MSCI Sri Lanka*** From Standalone to Frontier Markets November 2007 MSCI Venezuela Index**** From Emerging to Standalone May 2006 MSCI Greece Index From Emerging to Developed Markets May 2001 MSCI Portugal Index From Emerging to Developed Markets November 1997 *As of the close of the last business day of the month; **Pakistan was removed from the MSCI Emerging Market Index in December 2008 and maintained as a standalone country index; ***Sri Lanka was removed from the MSCI Emerging Markets Index in June 2001 and maintained as a standalone country index; ****Index was discontinued on January 2, 2008. 19
4. Characteristics of Emerging Markets Two important characteristics when valuing assets in EMs Information available about the investment Risk of the investment relative to global markets Size, transparency & liquidity of a market have important implications for state & accessibility of relevant data The quality & amount of available information also varies among emerging countries 20
Macroeconomic Characteristics EMs have higher levels of income & financial market depth than FMs; but EMs have lower GDP per capita & lower investable market cap than DMs Difference between EMs & DMs much greater than between FMs & EMs EMs fall just below DMs most are upper-middle income countries (World Bank) & ratio of market cap to GDP is at upper end of economies outside developed world 21
Macroeconomic Characteristics (Nominal GDP per Capita for EMs & DMs) 1987 1992 1997 2002 2007 CAGR* EM Asia 1,407 2,659 3,743 3,549 5,475 7.00% EM Latam 2,203 3,325 4,623 3,426 6,680 5.70% EM Emea 3,069 3,375 4,613 4,848 9,059 5.6% Emerging Markets 2,226 3,120 4,327 3,941 7,071 5.9% Europe 13,872 22,084 23,035 23,840 40,266 5.5% Developed Markets 13,685 19,983 25,149 24,507 35,795 4.9% 22
Macroeconomic Characteristics (Real GDP Growth Rates for EMs & DMs) 1987 1992 1997 2002 2007 EM Asia 6.10% 7.00% 6.70% 3.40% 6.30% EM Latam 2.40% 2.30% 4.50% 0.70% 5.60% EM EMEA 3.3% 1.0% 2.9% 3.4% 5.3% Emerging Markets 4.1% 3.6% 4.7% 2.7% 5.8% Europe 2.4% 2.6% 2.6% 3.0% 2.6% Developed Markets 3.1% 2.8% 3.1% 3.0% 3.0% 23
Measures of Market Size (Relative market capitalization) EMs highest average market cap relative to FMs No clear pattern between EMs & DMs Clear distinction between FMs & EMs 24
Measures of Market Size (No. listed companies & company market cap) 25
Measures of Market Size (Openness of a market to foreign investment) S&P/IFCI index tries to capture global exposure of a market stocks legally & practically available to foreign investors Most common restrictions include Special classes of shares for foreign owners Sector ownership restrictions Limits on ownership by a single foreign investor Company ownership limits different from national law National limits on aggregate foreign ownership 26
Market Liquidity Tendency towards illiquidity factor that differentiates EMs from DMs Major consideration for investors in EMs liquidity of their financial positions Liquidity ability to get in & out of investments quickly & at low cost 27
Transparency, Competitiveness & Corruption Transparency Measure: Opacity Index / O-Factor designed by PwC Competitiveness Measure: International Institute for Management Development (IMD) World Competitiveness Index Corruption Measure: Corruption Perception Index (CPI) provided by Transparency International 28
Risk & return characteristics of EMs 29
Risk & return characteristics of EMs 30
Recommended Readings Hawksworth, J. and Tiwari, A. (2011): The World in 2050. The accelerating shift of global economic power: challenges and opportunities. PwC, London Dimitrijevic, M. (2009): Why the phrase emerging markets no longer applies. Financial Times. 31