Malaysia and Greece the big losers from 30 years of EM equities
The world’s flagship emerging market stock index will celebrate its 30th birthday at the end of the year, but the celebrations may be muted in Malaysia and Greece.
During the life of the MSCI EM index Malaysia has managed to take its index weight from a mighty 33.8 per cent to a lowly 2.3 per cent, as the first chart shows.
Greece, on the other hand, has managed to hand any loyal investors a 39 per cent loss in total return, nominal dollar terms (a loss of 71 per cent in real inflation-adjusted terms), even as Mexico has rewarded its backers with a 95-fold nominal return (or 45 times in real terms), Argentina a 78-fold return (37 times real) and Brazil 60-fold nominal (28 times real).
Overall, since January 1 1998, the EM index has generated a decent 25-fold nominal return, 11.6-fold real, comfortably outstripping the 10-fold nominal return (4.6 real) of the developed market MSCI World alternative.
The MSCI EM index of 1988 was a very different beast from that of today, though. It boasted just 10 countries, including Portugal and Greece, which have spent much of the intervening period as developed markets, although Greece has once again slipped back to “emerging” status.
It included four Latin American countries, three from Southeast Asia and Jordan, since relegated to frontier status. Its lack of geographical reach was a reflection of its times.
With the Berlin Wall still intact, eastern Europe was bereft of stock exchanges, no mainland Chinese companies were listed on the Hong Kong exchange (so no HK H shares, now the index’s largest constituent), South Africa was viewed by many as off limits because of apartheid, and India, South Korea and Taiwan “were in effect cut off to foreign investors”, says Daniel Salter, head of EM equity strategy at Renaissance Capital, an emerging market- focused investment bank.
“The asset class, at sub-1 per cent of global equities, was an easy one to ignore. Today, EM represents 11 per cent of global equities,” Mr Salter adds.
Of the original 10, Malaysia was at the time by far the largest, accounting for 33.8 per cent of the EM index. Amid the flood of large countries that have joined the index since, it was inevitable that its weight would fall.
“It was in the ring with a bunch of minnows before; now it’s in the ring with a bunch of hippopotamuses,” says Geoff Dennis, head of global emerging market equity strategy at UBS.
This, however, cannot explain all of its demise to a lowly 2.3 per cent. Brazil’s share has only fallen from 18.9 per cent to 7.3 per cent over the same period, and Mexico’s from 7.7 per cent to 3.6 per cent.
Mr Dennis believes Malaysia “has become a relative backwater, in terms of places to put money in emerging markets”.
When it comes to investing in Asia, the north of the continent, specifically South Korea, Taiwan, China and to some extent India, have become dominant, he says.
Southeast Asia is rather somewhere “people buy when they are not that comfortable with the asset class as a whole”, due to its more defensive status. And even here the Philippines and Indonesia are more popular, given Malaysia’s sometimes difficult politics and corruption scandals.
Gary Greenberg, head of global emerging markets at asset manager Hermes, notes that in the 1980s Malaysia was primarily a commodity exporter, with tin and rubber to the fore, but over time its terms of trade went against it.
In response, the government attempted to turn the country into a “knowledge economy”, but ”accountability wasn’t the government’s strong suit and although individuals connected to large building projects thrived, Malaysia just didn’t have what it took to emulate Singapore”, Mr Greenberg says.
Unlike its smaller, richer neighbour, Malaysia has provided fewer opportunities for its Chinese population to prosper, encouraging many of the more talented to leave, Mr Greenberg argues, while wages have been too high, and the country too small, to compete with China.
“There is a tech manufacturing sector of which nothing is quoted, but it is primarily owned by foreign firms,” he says. “Tin, rubber and palm oil still get produced, but value addition is the secret sauce and Malaysia just hasn’t had the scale to compete.
“The anomaly really is that it was 30-odd per cent of the benchmark at one point, with its, at the time, about 17m people and rather small GDP.”
Charles Robertson, global chief economist at Renaissance Capital, argues that “democratisation reversed in Malaysia at a very similar income level that it has done in Russia and Turkey, and these three are exceptional because democracy has never reversed at their, relatively high, income levels before”.
He believes this may be an additional factor behind its relative decline. “Companies become less about shareholder value, more about proximity to [presidents] Putin, Erdogan and the ruling party in Malaysia,” Mr Robertson says.
In truth, investors who have stuck with Malaysia since 1998 have not done disastrously, with a near eight-fold return in nominal terms, 3.5-fold in real terms, better than that of Portugal, Jordan and Greece.