Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, edged down 0.3%  for the week.
  • How has the Emerging Markets asset class evolved in recent years – and is it still worth a portfolio allocation?

Emerging Markets as an equity asset class began attracting investor attention in the 1980’s, but what does that moniker represent today? MSCI, the industry-standard index provider, builds its universe of Emerging Market countries by considering a country’s economic development, the size and liquidity of securities traded, and market accessibility to foreign capital.

The countries lumped into the MSCI Emerging Markets index have changed dramatically over time. In 1988, MSCI had 10 countries in its Emerging Markets index, mainly the big South American economies. At the end of 2023, there were 24 countries with a much broader array of economies and market representation.

Inclusion in a MSCI index is a long-sought after goal for many countries as there is a tremendous amount of investor capital that tracks MSCI’s international equity indexes. MSCI and other index providers have become very powerful entities as the standard-bearers for classifications such as Emerging Markets.

The inclusion of China in 1996 was a watershed moment for the index, and the influence of China on MSCI’s Emerging Markets index grew over time. Having long included China’s H-shares (shares listed in Hong Kong), after many years of pressure from China and the loosening of its capital controls, MSCI made the decision in 2018 to include China’s on-shore A-shares in the index.

At the time of the A-share inclusion, market analysts spoke highly of the decision. One Chief Investment Officer at a global fund management company said at the time that the move began "adjusting China's weight within global equity indices to match its importance to the global economy." At one point a few years ago, China represented well over 40% of the MSCI Emerging Markets index.

The Chinese stock market and its economy have languished in recent years (for reasons beyond the scope of this note) while other countries in the MSCI Emerging Markets basket have flourished. For example, last year, the MSCI India Index rose 21%, the MSCI Taiwan index was up 31% - yet the Emerging Markets index in total was only up 10%. Emerging Markets’ lagging performance versus Developed Markets (and the US in particular) can be mainly attributed to China’s recent travails.

As a result, the relative representation of China in the MSCI Emerging Markets index has dropped substantially. As of the end of February, China’s weight had fallen to 25% of the index.

Should recent trends continue, China may have a cloudy future in the MSCI index, playing less and less of a role in the MSCI Index and by extension the Emerging Markets equity asset class. Although allocations to Emerging Markets are relatively small in client portfolios, exposure to Emerging Markets expands the equity opportunity set to include important growth stocks such as TSMC (Taiwan Semiconductor) and countries with development potential, such as India.

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