ecm lecture 1 presentation

7/31/2019 ECM Lecture 1 Presentation

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Emerging Capital Markets

AG907M.Sc. Investment & Finance

M.Sc. International Banking & Finance

Lecture 1 Defining & CharacterizingEmerging Capital Markets

I g n a c i o R e q u e j o G l a s g o w , 2 0 1 0 / 2 0 11


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Overview of Lecture1. Introduction

2. Definition of Emerging Markets

3. About the Indices

4. Characteristics of Emerging Markets

E m e rg i n g C a p i t a l M a r k e t s I g n a c i o R e q u e j o 1


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1. IntroductionEmerging financial markets Several definitions

Importance of emerging capital markets

No clear guidelines for valuation of assets & securitiesin emerging markets

Different from developed markets: transparency,governance, liquidity, volatility, transaction costs, etc.

Increasing investment flows to emerging markets Faster rate of economic growth



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2. Definition of Emerging MarketsTier of economies below developed economies

S&P/IFC indices Emerging markets should meet one of

the following two criteria

Low-, lower-middle, or upper-middle income economyas defined by World Bank (World Banks mainclassification criterion GNI per capita)

Low investable market capitalisation relative to mostrecent GDP figures

http://ecm%20lecture%201%20table%201%20world%20bank%20list%20of%20economies.pdf/


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2. Definition of Emerging MarketsS&P/IFC indices Developed markets should meet bothof the following conditions

GNI per capita exceeds the World Banks upper-middleincome threshold for at least three consecutive years Investable market capitalization to GDP in the top 25

percent of the emerging market universe for threeconsecutive years

S&P/IFC indices use other criteria to categorise countriesinto developed, emerging, frontier & unclassified markets



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3. About the indices S&P Global BMI covers approximately 10,000

companies in 45 countries

MSCI ACWI IMI covers over 9,000 securities in 45countries

In both cases all 45 countries are classified as either

developed or emerging



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S&P Emerging BMI S&P Global BMI covers approximately 10,000

companies in 45 countries

All listed stocks at least US$ 100 million in floatadjusted market capitalization & value traded of atleast US$ 50 million for last 12-months

45 constituent countries classified as developed oremerging S&P Developed BMI and S&P EmergingBMI



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S&P Global BMI: CountriesS&P Developed BMI

North America: CAN, USA

Europe: AUS, BEL, DEN,FIN, FRA, GER, GRE, IRE,ITA, LUX, NET, NOR,POR, SPA, SWE, SWI, UK

Asia Pacific: AUS, HK,

JAP, NZ, SIN, SK

Middle East & Africa: ISR

S&P Emerging BMI

Latin America: BRA,CHILE, MEX, PER

Europe: CR, HUN, POL,RUS, TUR

Asia Pacific: CHI, INDI,INDO, MAL, PHI, TAIW,

THAI

Middle East & Africa:EGY, MOR, SA



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S&P Global BMI



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S&P IFCI Liquid and investable subset of S&P Emerging Plus

BMI S&P Emerging BMI plus South Korea

Company eligibility criteria a stock must have float-adjusted market capitalization of US$ 200 million orgreater (constituents that fall below US$ 200 millionbut remain above US$ 150 million remain in the index)



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S&P IFCI

10E m e rg i n g C a p i t a l M a r k e t s I g n a c i o R e q u e j o


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S&P Emerging BMI vs. S&P IFCI

S&P Emerging BMI

S&P IFCI



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S&P Frontier Indices Equity markets with less liquid stocks from lesser

known emerging markets

Include S&P Frontier BMI, S&P Extended Frontier 150and S&P Select Frontier

S&P Frontier BMI measures performance of 37

relatively small & illiquid markets (individual countryindices include all publicly listed equities representingat least 80% of market capitalization in each market)



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S&P Frontier BMI

Country coverage

Index portfoliocharacteristics



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MSCI Developed Markets Indices

The MSCI World Indexcovers over 6,000

securities in 24 developedmarkets countries,spanning large, mid, smalland micro cap securitieswhich can be segmented

across styles and sectors

Country coverage



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MSCI Emerging Markets Indices

The MSCI EmergingMarkets Indices cover over

2,600 securities in 21markets currently classifiedas EM countries spanninglarge, mid and small capsecurities and can be

segmented across stylesand sectors

Country coverage



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MSCI Frontier Markets Indices

The MSCI FrontierMarkets Indices

include 31 countriestaking investabilityrequirements intoconsideration withineach market and

comprising large,mid and small caprepresentation

Country coverage



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MSCI International Equity Indices(Country & Market Coverage)



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MSCI ACWI IMI Index



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MSCI Indices Evolution

Country Indices Market Reclassification Date*

MSCI Israel Index From Emerging to Developed Markets May 2010

MSCI Bangladesh Index From Standalone to Frontier Markets May 2010

MSCI Argentina Index From Emerging to Frontier Markets May 2009

MSCI Pakistan Index** From Standalone to Frontier Markets May 2009

MSCI Trinidad & Tobago Index From Standalone to Frontier Markets May 2009MSCI Jordan Index From Emerging to Frontier Markets November 2008

MSCI Lithuania Index From Standalone to Frontier Markets November 2008

MSCI Serbia Index From Standalone to Frontier Markets November 2008

MSCI Sri Lanka*** From Standalone to Frontier Markets November 2007

MSCI Venezuela Index**** From Emerging to Standalone May 2006MSCI Greece Index From Emerging to Developed Markets May 2001

MSCI Portugal Index From Emerging to Developed Markets November 1997

*As of the close of the last business day of the month; **Pakistan was removed from the MSCI Emerging Market Index in December 2008 and maintained as astandalone country index; ***Sri Lanka was removed from the MSCI Emerging Markets Index in June 2001 and maintained as a standalone country index; ****Indexwas discontinued on January 2, 2008.



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4. Characteristics of Emerging MarketsTwo important characteristics when valuing assets in EMs

Information available about the investment Risk of the investment relative to global markets

Size, transparency & liquidity of a market have importantimplications for state & accessibility of relevant data

The quality & amount of available information also variesamong emerging countries



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Macroeconomic Characteristics

EMs have higher levels of income & financial marketdepth than FMs; but EMs have lower GDP per capita &lower investable market cap than DMs

Difference between EMs & DMs much greater thanbetween FMs & EMs

EMs fall just below DMs most are upper-middle

income countries (World Bank) & ratio of market cap toGDP is at upper end of economies outside developedworld



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Macroeconomic Characteristics(Nominal GDP per Capita for EMs & DMs)

1987 1992 1997 2002 2007 CAGR*

EM Asia 1,407 2,659 3,743 3,549 5,475 7.00%

EM Latam 2,203 3,325 4,623 3,426 6,680 5.70%

EM Emea 3,069 3,375 4,613 4,848 9,059 5.6%

Emerging Markets 2,226 3,120 4,327 3,941 7,071 5.9%

Europe 13,872 22,084 23,035 23,840 40,266 5.5%

Developed Markets 13,685 19,983 25,149 24,507 35,795 4.9%

http://ecm%20lecture%201%20table%202%20gdp%20per%20capita.pdf/


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Macroeconomic Characteristics(Real GDP Growth Rates for EMs & DMs)

1987 1992 1997 2002 2007

EM Asia 6.10% 7.00% 6.70% 3.40% 6.30%

EM Latam 2.40% 2.30% 4.50% 0.70% 5.60%

EM EMEA 3.3% 1.0% 2.9% 3.4% 5.3%

Emerging Markets 4.1% 3.6% 4.7% 2.7% 5.8%

Europe 2.4% 2.6% 2.6% 3.0% 2.6%

Developed Markets 3.1% 2.8% 3.1% 3.0% 3.0%

http://ecm%20lecture%201%20table%203%20gdp%20growth%20rates.pdf/


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Measures of Market Size(Relative market capitalization)

EMs highest average market cap relative to FMs No clear pattern between EMs & DMs Clear distinction between FMs & EMs

http://ecm%20lecture%201%20table%204%20market%20cap%20ratios.pdf/


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Measures of Market Size(No. listed companies & company market cap)

http://ecm%20lecture%201%20table%205%20company%20size.pdf/


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Measures of Market Size

(Openness of a market to foreign investment)

S&P/IFCI index tries to capture global exposure of amarket stocks legally & practically available toforeign investors

Most common restrictions include

Special classes of shares for foreign owners Sector ownership restrictions

Limits on ownership by a single foreign investor Company ownership limits different from nationallaw

National limits on aggregate foreign ownership



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Market Liquidity

Tendency towards illiquidity factor that differentiatesEMs from DMs

Major consideration for investors in EMs liquidity oftheir financial positions

Liquidity ability to get in & out of investments quickly

& at low cost

http://ecm%20lecture%201%20table%206%20market%20liquidity.pdf/


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Transparency, Competitiveness &

Corruption Transparency

Measure: Opacity Index / O-Factor designed by PwC

CompetitivenessMeasure: International Institute for ManagementDevelopment (IMD) World Competitiveness Index

CorruptionMeasure: Corruption Perception Index (CPI) providedby Transparency International

http://ecm%20lecture%201%20table%207%20transparency%20and%20corruption.pdf/


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Risk & return characteristics of EMs



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Risk & return characteristics of EMs


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Recommended Readings

Hawksworth, J. and Tiwari, A. (2011): The World in2050. The accelerating shift of global economic power:challenges and opportunities. PwC, London

Dimitrijevic, M. (2009): Why the phrase emergingmarkets no longer applies. Financial Times.

http://ecm%20reading%20ft%20why%20the%20phrase%20emerging%20markets%20no%20longer%20applies.pdf/http://ecm%20reading%20pwc%20the%20world%20in%202050.pdf/

ecm lecture 1 presentation

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