Changes in MSCI Emerging Market Indices-Effective Month End

As part of its semi-annual review, MSCI has announced changes in global emerging market benchmark indices, with China and Brazil stocks among the main beneficiaries. MSCI estimates that more than $3 trillion are benchmarked against indices globally. The changes will be be effective at the end of the month.

Eleven Brazilian companies will be added and none removed. This is the most net additions. There will be seven Chinese companies added and one that will be removed.

Rounding out the BRICs, Russia and India look like net washes, with two new additions from both countries and two deletions from both countries.

If Brazil is the biggest beneficiary, it may come at the expense of Taiwan, which has six companies that will be dropped and none added.

Note that MSCI will be creating a country index for Bangladesh.

Brazil which is struggling to stem the appreciation of its currency can only see its challenges exacerbated by the MSCI decision. Not all of the new inclusions have ADRs or dual listings. There continues to be speculation that Brazilian officials are considering additional measures to stem the demand for BRL. Taiwan, which has banned foreign purchases of time deposits, on the other hand, may be marginally relieved with news that six of its companies will be dropped, which may encourage some Taiwanese dollar sales toward the end of the month.

Lastly, previously it seemed that many investors saw the emerging markets on an opportunistic basis, but now it appears that many investors now embrace emerging markets as a permanent part of one's portfolio and part of the diversification effort.

According to preliminary BEA figures, US foreign equity holdings were worth $2.85 trillion at the end of last year, whereas foreign ownership of US equities was valued at $1.83 trillion. Non-US investors generally show a greater appetite for fixed income investments over equity. The greater equity exposure, which is understood as a riskier portfolio compared with one weighted more toward fixed income, helps explain why US foreign investment tends to generate a higher return than foreign investment in the US.