JAMES GARD, senior editor for Morningstar.co.uk, wonders if the world is changing faster than indices can react?
Not too long ago investors were tremendously excited about China's prospects and saw how its economic miracle was capable of producing superior investment returns than those seen in Western markets.
The last wave of this enthusiasm crested in 2020 and it’s been downhill since, bar the odd revival in July this year.
China went from a powerhouse of the MSCI EM index to looking like a liability. In 2020, this influential index (and the one that active funds are often benchmarked against) had a weighting of nearly 41% to China. While that’s now 33%, the weighting is more than double that of Taiwan (14.77%), India (14.21%) and South Korea (12.38%).
That means investing in EM indices gets you a big dollop of Chinese equities and some smaller servings of other Asian giants. Brazil, enjoying something of a revival due to the commodities boom, is a distant 5.49%.
MSCI defines emerging markets according to three pillars: their economic development; the size and liquidity of the markets; and their openness to foreign investors.
Economic development relies on gross national income per head and the income of citizens, according to World Bank measures. There's talk of tweaks to the index in the future, with changes to the economic development metrics and a broadening of the market cap metrics.
Do read James' take on India vs. China in China, the problem child in EM investing
