What is an emerging market and how does it affect your economy and investments?

Bloomberg Line – ‘Emerging market’ is a title given to a country in the early stages of economic development. Begins to generate growth and capital flow Through its industrial production and sales to foreign trade.

Morgan Stanley Capital International (MSCI) is a company that uses various indices to measure the performance of stocks, funds, bonds, etc. By stock indices it consists of three major groups: Developed Markets (MD), Emerging Markets (EM) and Frontier Markets (MF).

“By definition, there is no specific requirement to classify a market as a frontier. On the other hand, to classify it as emerging, it is necessary to demonstrate transparency to foreign investors, Has not gone through a period of economic stress such as high inflation or political instability and has at least three stocks and two companies deemed eligibleStefania Mosquera, senior equity research associate at CreditCorp Capital, explained. Bloomberg Tax.

What is the importance and purpose of these sections?

The MSCI Emerging Markets Index aggregates the representation of mid- and large-cap companies in 24 emerging market (EM) countries, according to an official text dated August 31, 2023. With 1,421 members, The index comprises approximately 85% of the free float-adjusted market capitalization in each country.

These countries are: Saudi Arabia, Brazil, Chile, China, Colombia, Korea, Egypt, Philippines, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, Poland, Qatar, Czech Republic, South Africa, Taiwan, Thailand, Turkey and Emirates Arabs .

MSCI indicators are a representative sample of company stocks that are easy to trade and have high liquidity, to reflect the evolution of companies and their value, to analyze risks and potential returns.

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“MSCI codes are very important because they are used Criterion For mutual funds, It is used by more than 1,030 exchange-traded funds (ETFs) as investment instruments in the world and 99 of the 100 most prominent institutional portfolio managers worldwide are clients of the firm.GBM stands for Academy.

In its text, MSCI points out that The Emerging Markets Index is reviewed quarterly in February, May, August and November, with the objective of reflecting changes in the underlying bond markets in a timely manner, while limiting undue volatility of the index. It mentions the index during the half-yearly reviews of May and November “It has been restructured and the cut-off points for large and mid caps are being recalculated.”

That is, stocks of companies that do not meet the guidelines are added or removed, ensuring that the index accurately reflects the composition of the market it measures.

Emerging economies face broader challenges

In the ‘Global Economic Prospects’ report released by the World Bank (WB) in June this year, This illustrates that global growth has slowed and the risk of financial stress in emerging markets and developing economies (EMED) is intensifying.

Global growth is projected to slow from 3.1% in 2022 to 2.1% in 2023. Especially in MEEDs, excluding China, Growth is expected to slow to 2.9% this year from 4.1% last year.

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“Many developing economies are struggling to cope with weak growth, persistently high inflation and record levels of debt. HoweverTheir situation could worsen if other risks emerge, such as the possibility that new financial pressures in advanced economies could create more widespread secondary effects.” said Ayhan Ghose, Deputy Chief Economist at the World Bank Group.

Will the situation in Colombia lead to a border market?

Until now, Colombia continues to meet the characteristics of an emerging market, but there are some risks and conditions that could change this classification.

In early September, JP Morgan warned that the Colombian market could suffer if the liquidity squeeze continued: “We see no significant positive factors for Colombian stocks” The bank wrote in an analysis.

Along with this, the unattractive macroeconomic environment and politically uncertain outlook are keeping the bank “on the sidelines,” he said. “Over all Colombia stands out in valuations because the multiples are so discounted, but with a bad fallout and weak profitability. We continue to think that MSCI may reclassify Colombia from emerging markets, leading to an exit and lower outlook” said Bank of New York.

Muskera said Bloomberg Tax In 2013, Colombia had 16 acts that were deemed eligible. At the moment there are only three eligible shares: two Bancolombia shares and ISA shares.

“So the question is, what happens if one of these stocks is no longer considered eligible? In that case the answer would be that Colombia would be considered a frontier market.” he added.

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For senior associate Research In CreditCorp Capital Variable Income, the MSCI designation has a somewhat qualitative way of classifying each country’s risk, and the key aspect of the boundary and emerging classification is liquidity. “The more liquid a market is, the less risky it is for the investor because they can enter or liquidate positions quickly.said.

For context, emerging market funds from provider iShares are worth approximately $108 billion. Meanwhile funds pursuing frontier markets accounted for only US$631 million. This illustrates that emerging funds represent not as much risk as frontier markets.

“At CreditCorp Capital, we do not believe in our fundamental position that the Colombian market should be reclassified as a frontier market during the restructuring or review in November. Having said that, We also think we are very close to that, and we think it will be an important topic of conversation in Colombia in the coming months.”, he concluded.

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