MSCI has moved in mysterious ways, its wonders to perform… and again left Chinese stocks out of its global benchmark indices. At the same time, we learn that, after three years in index limbo, it will not add South Korea and Taiwan to the family of developed markets. These decisions have happened despite the fact that all three nations are among the world’s top 25 economies: China at number 2, Korea at 15 and Taiwan at 25.
As always, MSCI justified its decisions with reference to technical reasons relating to capital controls, market accessibility and tradability. Yet one cannot help but think that there are – deep down – other factors at work. Indeed, it is hard not to conclude that, like so many multilateral organisations that are located in and have grown out of the West, the likes of the MCSI are having difficulty coming to terms with admitting the leading lights of the emerging world – and especially China and east Asia – into their developed world clubs. Think of how distorted the IMF voting quotas remain: Belgium has 1.86 per cent (with a population of 11m and a GDP of $535bn) against South Korea with 1.37 per cent (50m and $1.27tn respectively), while the UK has a voting quota of 4.29 per cent (64m and $2.8tn respectively) versus China with 3.81 per cent (1.35bn and $9.2tn respectively.)
For us investors, determining just how to deal with these Asian “pretenders” to developed market status has highlighted an even deeper issue of classification that is increasingly dividing emerging markets: there is a growing recognition that there are effectively two sub-categories – call them clubs – within the EM asset class. In one club, there is China-centred east Asia: China, Korea, Taiwan and Asean; in the other club, there is everyone else in the emerging fraternity: Latin America, Africa, eastern Europe and the Indian sub-continent.
Who belongs to which club is not simply a matter of geography; economic practice also plays a part. With isolated qualifications, the former category tends to run structural current account surpluses (Indonesia being the only exception) while the latter group tends to run structural deficits (with the oil exporters being the main exceptions). In economic size, China-centred east Asia outranks the rest of the emerging world combined; indeed as a single economic unit, it now outranks North America as well as Europe. Even excluding China, this group would rank as the world’s fourth largest economy, after the US, China and Japan.
Even though EM is still the asset class that attracts most investor interest, investors are starting to appreciate that there is something ‘special’ about China-centred east Asia. As a result, some – the smart money sovereign wealth funds in particular – are seeking a more focussed exposure to this region, in all asset classes: fixed income, equities, property and even cash. The Norwegian sovereign wealth fund recently sold European bonds to fund an increased exposure to Asian bonds, whilst the Azeri sovereign wealth fund is seeking to add the Chinese renminbi to its cash holdings.
There are a number of distinct economic advantages that tend to set the countries of China-centred east Asia apart from their EM peers. Typically they operate managed currency regimes that give rise to their current account surpluses, with the result that their external account is buffered with significant foreign exchange reserves and, selectively, sovereign wealth funds; these cushions help reduce their downside currency risk. Their exchange rate policies also allow their monetary authorities a degree of independence when it comes to setting interest rates and so determining the duration and shape of their credit cycles; such independence arises from not being reliant on external liquidity to fund current account deficits and so, by extension, not being exposed to the capricious behaviour of Western monetary authorities in the operation of the latter’s various quantitative easing programmes. The resulting lower volatility in the east Asian bloc’s credit cycles helps underwrite less volatile investment cycles and so generate smoother GDP growth trajectories. Furthermore, being a region that is generating capital surpluses means their investment cycle and with it their capital markets are not so exposed to the ebb and flow of foreign-funded debt and equity investment.
For now, current account deficit running Indonesia is the east Asian exception that proves this normal rule. Thus far, it has not followed standard China-centred east Asia practice; indeed it has even been designated one of the fragile five emerging markets along with Brasil, South Africa, Turkey and India. However, investors are now wondering whether this 240m-strong archipelago nation will, especially if Joko Widodo is elected the next president, do a Malaysia and continue to diversify its export profile away from natural resources towards manufactured exports. If so, it could move across to the more-normal-for-an-east-Asian-nation structural current account surplus camp. (A perhaps even more intriguing prospect might be whether, in the wake of Narendra Modi’s comprehensive electoral victory in India, South Asia’s giant might similarly do a Bangladesh, pursue a policy of export-led growth and move away from the current account deficit camp.)
Combined, the economic characteristics detailed above tend to reduce the risk profile of all the asset classes of China-centred east Asia in that they tend to create a less volatile economic environment. For investors, this means more capital protection on the downside and, yes, a lower likelihood of outsized capital gains on the upside. On balance, over time, the net effect of market movements when measured in US dollars has tended to yield better risk-adjusted returns, particularly for fixed income, property and cash spaces.
Given that many investors are tied to the way MSCI defines the emerging world, the option of going materially overweight say east Asia is simply not available to them. MSCI defines who is a member of which club and most investors are obliged to live within this straitjacket whether they like it or not and whether it fits with changing global economic realities or not. By 2025, China will probably have the world’s largest GDP; but do not be surprised if, even then, it is still classified as emerging!
Groucho Marx once quipped he would not want to be a member of any club that would have him as a member. So when the time eventually comes that MSCI can no longer come up with yet another reason to say ‘no’ to China, Korea and Taiwan and deigns to accept them as members to the developed market club, the latter may yet feel the same way as the more amusing Marx. Looking at the sclerotic growth prospects – both economic and demographic – facing the West and Japan today, one would sympathise with such east Asian reticence at the prospects of being admitted to what has recently been described as an “old age people’s home”. This may also explain why the Asian region has decided to set up its own club: the Shanghai Cooperation Organisation. And who can blame them?
Michael Power joined Investec Asset Management as a strategist in December 2002. His current responsibilities include understanding how the shift in the centre of economic gravity from West to East is impacting on the world of investment.
就目前而言，对于得到东亚证明的上述常规，只有经常账户处于赤字的印尼是例外。印尼迄今没有追随以中国为核心的东亚的标准行为模式；实际上，印尼与巴西、南非、土耳其和印度一起被认为是5个脆弱的新兴市场。然而，投资者现在想知道这个有着2.4亿人口的群岛国家，是否会学习马来西亚的做法（尤其是如果佐科?维多多(Joko Widodo)当选为下任总统的话），继续降低其自然资源的出口，加大制造业产品的出口。如果能够做到，印尼就可能加入对东亚经济体来说更为正常的结构性经常账户盈余阵营中（一个或许更为引人关注的前景是，在纳伦德拉?莫迪(Narendra Modi)获得全面选举胜利之后，印度是否同样会向孟加拉国学习，实施一种出口拉动型增长政策，从而脱离经常账户赤字阵营）。
格鲁乔?马克思(Groucho Marx)曾经诙谐地说道，他不想加入任何一个愿意吸收自己为会员的俱乐部。因此，当MSCI最终再找不出理由对中国、韩国和台湾说不，而屈尊接受它们加入发达市场俱乐部的时候，后者可能和更为诙谐有趣的马克思的想法一样。看看西方和日本如今面临的僵化的增长前景（无论是在经济上还是在人口结构上），人们不难理解，为何面对被最近有“老年人之家”之称的发达市场俱乐部接纳的前景，东亚沉默不语。这或许也能解释为何东亚地区决定建立自己的俱乐部：上海合作组织(Shanghai Cooperation Organisation)。谁能责怪他们呢？
本文作者于2002年12月进入天达资产管理公司(Investec Asset Management)担任策略师。他当前负责研究经济重心从西方转向东方如何影响投资界。