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As the dozen Asian core and frontier stock markets in the Morgan Stanley Capital International indices were almost all positive and outperformed other emerging market regions through April, the provider marked 30 years since its launch with a paper both looking back and into the future with outsize China weighting. Full “A” share incorporation over stages will constitute 40% of the benchmark and be “transformative,” as developing markets are currently 12% of global equities compared with 1% in 1987. Allocation rose from a low base in the early 2000s as wider foreign investor access improved exchange infrastructure and trading.

In 2007 frontier and small company gauges joined the main one where capitalization is dominated by Asia, including Korea and Taiwan. As the extra Chinese portion at 20% of the “A” share free float is phased in by the end of this year, the region will represent 60% of the basic public listings yardstick. While dedicated investors laud three decades of index acceptance and evolution, to avoid geographic concentration and boost total return they increasingly seek to go “off index,” often taking private equity bets in a comprehensive strategy.

MSCI points out that the economic growth premium over advanced markets is narrower but intact. The differential was minor in the 1980s, as the then “Third World” struggled to overcome commodity price collapse and debt crises, and following a period of breakneck 7-10% annual expansion, it has come full circle. Sound fiscal, monetary and structural policies helped navigate the cycle, with double-digit inflation now rare through nominally independent central banks. Net public debt is half advanced economies’ 80% of gross domestic product average, and emerging markets’ current account balance is healthy.

From a technical perspective, the price-to-book value discount was 20% the past two decades, and volatility, as measured by standard deviation, was relatively low. Emerging markets in the index offer diversification and are uncorrelated in normal times, and portfolios that did not hedge currencies had superior results from 2010-17. So-called factor investing following momentum and yield signals produced positive returns over a 20-year period. Environmental, social and governance (ESG) screening is common, and “sustainability” themes in line with the United Nations 2030 goals will be standard in the benchmark’s next generation, according to the research.

In parallel with its MSCI slice, Asia was also the overwhelming regional preference for private equity engagement in the latest survey of trade group EMPEA, which held its annual conference in Washington this week

In parallel with its MSCI slice, Asia was also the overwhelming regional preference for private equity engagement in the latest survey of trade group EMPEA, which held its annual conference in Washington this week. It was formed 15 years ago in partnership with the World Bank’s International Finance Corporation arm, which compiled the original database to track public stock markets. The IFC invests in venture capital funds and has its own asset management unit. The poll questioned 100 institutions in 40 countries controlling almost $1 trillion, and they intend to hike near-term commitments in Southeast Asia in particular, followed by China and India. Brazil and India rounded out the top five favorites, while Russia, Turkey and the Middle East were at the bottom of the list. Industry and size focus are on technology and the middle market, and China plays led in 2018 with $35 billion of the record $90 billion in emerging market private equity allocation, 15% of the global total.

Conference panels cited ASEAN’s diversity as a challenge and urged further commercial and financial integration to promote larger-scale exposure. China’s “transition” was emphasized, with slower growth and mounting trade disputes and new rules for local “alternative” asset managers. The Shanghai Stock Exchange’s additional board for startups is itself nascent as an exit route, and buying into security tech companies has provoked a backlash from government pension funds in the US and Europe.

As India awaits the outcome of month-long national elections, with Prime Minister Narendra Modi widely expected to win again, currency fluctuations and non-bank lender insolvency are overriding issues. Conference speakers urged a shift to private credit, and distressed debt in particular, with the proliferation of bad loans to real estate and infrastructure borrowers. Local house Edelweiss already has a $1.5 billion “stressed assets” facility to purchase and restructure them, with the support of a new bankruptcy code and central bank edicts on financial system cleanup. These packaged securities are due to rally with Modi’s likely re-election, in a mixed signal for state and private lenders’ steep transformation path.

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