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Emerging Capital Markets
AG907M.Sc. Investment & Finance
M.Sc. International Banking & Finance
Lecture 1 Defining & CharacterizingEmerging Capital Markets
I g n a c i o R e q u e j o G l a s g o w , 2 0 1 0 / 2 0 11
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Overview of Lecture1. Introduction
2. Definition of Emerging Markets
3. About the Indices
4. Characteristics of Emerging Markets
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1. IntroductionEmerging financial markets Several definitions
Importance of emerging capital markets
No clear guidelines for valuation of assets & securitiesin emerging markets
Different from developed markets: transparency,governance, liquidity, volatility, transaction costs, etc.
Increasing investment flows to emerging markets Faster rate of economic growth
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2. Definition of Emerging MarketsTier 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 economyas defined by World Bank (World Banks mainclassification criterion GNI per capita)
Low investable market capitalisation relative to mostrecent GDP figures
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2. Definition of Emerging MarketsS&P/IFC indices Developed markets should meet bothof the following conditions
GNI per capita exceeds the World Banks upper-middleincome threshold for at least three consecutive years Investable market capitalization to GDP in the top 25
percent of the emerging market universe for threeconsecutive years
S&P/IFC indices use other criteria to categorise countriesinto developed, emerging, frontier & unclassified markets
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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 45countries
In both cases all 45 countries are classified as either
developed or emerging
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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 floatadjusted market capitalization & value traded of atleast US$ 50 million for last 12-months
45 constituent countries classified as developed oremerging S&P Developed BMI and S&P EmergingBMI
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S&P Global BMI: CountriesS&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
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S&P Global BMI
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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 float-adjusted market capitalization of US$ 200 million orgreater (constituents that fall below US$ 200 millionbut remain above US$ 150 million remain in the index)
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S&P IFCI
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S&P Emerging BMI vs. S&P IFCI
S&P Emerging BMI
S&P IFCI
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S&P Frontier Indices Equity markets with less liquid stocks from lesser
known emerging markets
Include S&P Frontier BMI, S&P Extended Frontier 150and S&P Select Frontier
S&P Frontier BMI measures performance of 37
relatively small & illiquid markets (individual countryindices include all publicly listed equities representingat least 80% of market capitalization in each market)
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S&P Frontier BMI
Country coverage
Index portfoliocharacteristics
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MSCI Developed Markets Indices
The MSCI World Indexcovers over 6,000
securities in 24 developedmarkets countries,spanning large, mid, smalland micro cap securitieswhich can be segmented
across styles and sectors
Country coverage
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MSCI Emerging Markets Indices
The MSCI EmergingMarkets Indices cover over
2,600 securities in 21markets currently classifiedas EM countries spanninglarge, mid and small capsecurities and can be
segmented across stylesand sectors
Country coverage
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MSCI Frontier Markets Indices
The MSCI FrontierMarkets Indices
include 31 countriestaking investabilityrequirements intoconsideration withineach market and
comprising large,mid and small caprepresentation
Country coverage
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MSCI International Equity Indices(Country & Market Coverage)
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MSCI ACWI IMI Index
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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 2009MSCI 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 2006MSCI 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 astandalone country index; ***Sri Lanka was removed from the MSCI Emerging Markets Index in June 2001 and maintained as a standalone country index; ****Indexwas discontinued on January 2, 2008.
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4. Characteristics of Emerging MarketsTwo 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 importantimplications for state & accessibility of relevant data
The quality & amount of available information also variesamong emerging countries
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Macroeconomic Characteristics
EMs have higher levels of income & financial marketdepth than FMs; but EMs have lower GDP per capita &lower investable market cap than DMs
Difference between EMs & DMs much greater thanbetween FMs & EMs
EMs fall just below DMs most are upper-middle
income countries (World Bank) & ratio of market cap toGDP is at upper end of economies outside developedworld
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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%
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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%
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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
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Measures of Market Size(No. listed companies & company market cap)
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Measures of Market Size
(Openness of a market to foreign investment)
S&P/IFCI index tries to capture global exposure of amarket stocks legally & practically available toforeign 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 nationallaw
National limits on aggregate foreign ownership
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Market Liquidity
Tendency towards illiquidity factor that differentiatesEMs from DMs
Major consideration for investors in EMs liquidity oftheir financial positions
Liquidity ability to get in & out of investments quickly
& at low cost
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Transparency, Competitiveness &
Corruption Transparency
Measure: Opacity Index / O-Factor designed by PwC
CompetitivenessMeasure: International Institute for ManagementDevelopment (IMD) World Competitiveness Index
CorruptionMeasure: Corruption Perception Index (CPI) providedby Transparency International
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Risk & return characteristics of EMs
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Risk & return characteristics of EMs
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Recommended Readings
Hawksworth, J. and Tiwari, A. (2011): The World in2050. The accelerating shift of global economic power:challenges and opportunities. PwC, London
Dimitrijevic, M. (2009): Why the phrase emergingmarkets no longer applies. Financial Times.
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http://ecm%20reading%20ft%20why%20the%20phrase%20emerging%20markets%20no%20longer%20applies.pdf/http://ecm%20reading%20pwc%20the%20world%20in%202050.pdf/