The MSCI Emerging Markets (EM) Index has emerged as one of the most popular benchmarks for investors who want to invest in the exciting growth of emerging markets of developing nations. The term emerging markets refers to rapidly developing countries that experienced changes in their economy, steps towards industrialization, and/or enhancements of people’s quality of life. Investors can access these emerging markets through the MSCI Emerging Markets Index; they get exposure to these markets’ high growth rates, with appropriate hedging against uncertainties such as change in political power, regulatory adjustments, or unpredictable economic conditions.
In this article, then we will be discussing what MSCI EM Index is, its operation, importance in the world of finance and finally, investment opportunities in emerging markets and their drawbacks. We shall also look at how it is arranged and why it has become very central in global investment policies.
What is the MSCI Emerging Markets Index?
The MSCI Emerging Markets Index refers to an able-bodied index of securities, which have been drawn from the large and the mid-cap markets in the emerging markets. Introduced by MSCI (formerly Morgan Stanley Capital International) in 1988, the index consists of firms from countries with ‘emerging’ economies, rising middle-income consumers or currently undergoing industrialization processes.
Presently, to offer investors a practically meaningful sample of emerging markets, MSCI EM Index includes more than 20 countries, with China, India and Brazil among them. The index comprises approximately 1,400 stocks and is made of various markets including technology, finance and energy among others.
Why the MSCI Emerging Markets Index Matters
Modern economies are interesting because they may provide growth opportunities which developed countries cannot provide. Indeed, as the global trend towards urbanization, consumerism and technological enhancement rises, new first tier market nations such as China, India and Brazil emerge boldly. This has been seen as an opportunity, whose emblematic index is the MSCI EM Index.
The index matters for several reasons:
- Diverse Exposure: Through it investors are able to diversify in a broad manner across regions and industries given that those target economies are experiencing speedy growth.
- Growth Potential: The markets that have emerged into the global economy will expand more rapidly than the mature markets. The countries included in the index have higher GDP growth rates, increasing consumer spending, and growing middle-income population.
- Global Investment Trends: Specifically, the index reflects development of the globalization process, such as sharp growth of multinational companies in developing countries as well as a growing weight of emergent economies in the global economy.
- Currency Diversification: Investing in the MSCI EM Index enables investors to spread their money in terms of currency because most emerging market currencies rise as their markets develop.
Countries in the MSCI Emerging Markets Index
At the present time, the index comprises more than 20 countries from the emerging market category; their weightings are distributed across three regions: Asia, Latin America, and Eastern Europe. Here’s a breakdown of some of the major players:
| Country | Percentage of Index | Key Sectors |
| China | ~30% | Technology, Financials, Industrials |
| South Korea | ~12% | Technology, Automobiles, Finance |
| Taiwan | ~14% | Technology, Semiconductors |
| India | ~14% | Information Technology, Financials |
| Brazil | ~4% | Energy, Materials |
| South Africa | ~3% | Materials, Financials |
| Mexico | ~2% | Financials, Industrials |
These three countries show the role of Asia in the global economy and its strict leadership by China, Taiwan and Korea. These nations are the technologically developed nations while Brazil and India play a major role by contributing energy and industrial sectors.
Key Sectors Driving Growth
It is widely believed that emerging markets themselves are acting as the “growth engines” of the global economy and particular segments of these markets are of critical importance to firmly establish such a craze. The MSCI EM Index is heavily weighted toward the following industries:
- Technology: Holding 167 deposits out of the 250 global index, firms such as Alibaba, Tencent, and Taiwan Semiconductor Manufacturing (TSMC) are amongst the world’s leading technology innovators.
- Energy and Materials: Consequently, when countries such as Brazil and formerly South Africa industrialize themselves, energy demands, and resource exploitation drive the economy.
- Finance: Growing consumer needs create considerable increases in the size of banking, insurance and investment sectors in the emergent economies.
How the MSCI EM Index is Structured
The total population of the index is represented by emerging markets’ equities and the free float factor is adjusted on the basis of market capitalization. This means that it gives only the public float and not the float available to the insiders or the government. Additionally, it follows certain criteria to classify a country as “emerging,” such as:
- Economic Development: The country cannot be in a position to be considered to be conforming to other countries of the developed economy.
- Market Accessibility: The market system must be relatively open for global market investors to gain equal access to undertake their businesses.
- Size and Liquidity: Members of the index cannot be small or thinly traded stock, which is a quite reasonable requirement for any index.
Classification can be shifted either up or down, this has grave consequences on the capital flows of the country involved.
Benefits of Investing in the MSCI Emerging Markets Index
Investing in the MSCI EM Index provides several advantages:
- Diversification: Because the index can span across many industries and regions it can also lower risk and volatility for the investors. “It also helps as a hedge against cyclical slowdowns in any given country,” where the company has invested.
- Growth Opportunities: New economies are usually more vibrant than the developed ones in terms of their development. For instance, while 2% GDP may be trouble for a developed country, most emerging economies get more than 5% often.
- Long-Term Investment: Today’s globalization indicate that emerging markets offer long-term growth prospects. Since these economies are developing they are experiencing some changes in their stock markets as they mature and become more stable and attractive.
- Currency Gains: Volatility and possibility of appreciation of the emerging market currencies also add value to international investors. As the economy of these countries expands then their respective currency’s value rises in comparison to the dollar.
Risks of Investing in Emerging Markets
While emerging markets present exciting growth opportunities, they also come with certain risks that investors need to consider:
- Political and Economic Instability: Currently, most emerging markets face greater instances of political instability, constantly changing regulations and economy fluctuations than the developed markets.
- Currency Fluctuations: While currency appreciation is positive for investors, currency depreciation is negative for the investors returns.
- Market Liquidity: Some EM have less developed markets therefore it would be difficult to purchase or to sell some shares without affecting the market price.
- Regulatory Risks: They also pointed out that political decisions, tariffs as well as trade barriers impact on companies and consequently the investor’s gains.
Comparing MSCI Emerging Markets to Other Indices
The MSCI EM Index is compared with some other global indices, including the MSCI World Index and the MSCI All-Country World Index (ACWI).
- MSCI World Index: This index centers itself on developed markets and leaves out emerging ones. It is biased towards the United States, Japan and European countries.
- MSCI ACWI: As such the ACWI comprises both developed markets and emerging markets that make it to have wider coverage over the World Index and EM Index alone.
Despite the fact that the MSCI EM Index appears to provide higher levels of growth compared to the developed market, it has more risk compared to indices that are linked to the emerging markets. For investors aiming for their portfolio to grow in both growth and stability, the MSCI ACWI is great to invest in and for investors looking for extra higher growth opportunities to invest in, they may opt for MSCI EM Index.
Conclusion: Should You Invest in the MSCI Emerging Markets Index?
It is awareness that investing in the emerging markets has its risks, but the MSCI Emerging Markets SPA can help profit from the growth of some of the most dynamic emerging markets. Through investing in the index, a client has an opportunity to own stocks in the relevant industries of the global economy and diversify risks.
Nevertheless, it is critically important to take into consideration that business decisions may involve certain benefits, but also certain costs. Fluctuation in exchange rate, political risks and market risks affecting a particular country may affect the company performance hence the importance of a long term investment and investment diversification.
