So that is going to be the focal point of this conversation just demystifying the global jargon and more importantly making that defining line between what impacts our market and what may not.
Mark Matthews, Equity Research at Macquarie Capital Securities and Shane Oliver, Head Investment Strategy & Chief Economist at AMP Capital Investors will demystify the global jargon and more importantly make that defining line between what impacts our market and what may not.
Here is a verbatim transcript of their comments. Also watch the accompanying videos.
Q: The two crucial terms that we hear very often, EMs and DMs, what kind of universe do both these terms straddle and why is it important for someone who is investing in the Indian market to understand what an EM or DM is?
Matthews: Both of them are indices that have about anywhere from 25 to 35 countries in them and they are indices that are managed by several different companies. So I am sure these names are familiar to our viewers, S&P, Dow Jones, FTSE but the biggest one is MSCI. MSCI was the first company to create a global index over 40 years ago and then they created various sub-global indices including emerging and developed markets and very simply the difference between emerging and developed is one of maturity and both income, developed markets.
One prerequisite is that they should have high incomes per capita and also in terms of the maturity of the market itself. So the foreign exchange market should be open, short selling should be allowed, minority shareholders rights should be enforced and protected in developed markets. In emerging markets ' it is not to say that some emerging markets don't possess this attribute ofcourse some do but a lot of countries do end up in emerging markets because short selling is not permitted or the foreign exchange market is not open or fully convertible. But the general rule for an emerging market should be that it is a high growth low income economy. In other words, it is a polite term for third world and infact less developed country. It was a term that was more popular until around the 1980s and then that was seen as maybe a little bit politically incorrect.
So emerging markets was termed by a World Bank economist named Antoine van Agtmael.
Q: India would fall under that category you would say, India is an emerging market?
Matthews: Yes, in all four of the indices, as I said, there is S&P, FTSE, Dow Jones but the big one for the most institutional fund managers is MSCI than four of those India is represented.
Q: There is a sub-representation then within the emerging market region which is called the BRIC universe, what countries does that involve and why was this bracket made of just the BRIC universe within the EM context?
Matthews: That was invented by one individual named Jim O'Neill, economist at Goldman Sachs and I think it was ten years ago in 2001 he wrote a report where he created this acronym. So it stands for Brazil, Russia, India, China and it is curiously not an acronym that has developed into a full asset class of itself in terms of fund management. There are a few BRIC funds but it never took off as much as emerging markets did but what is interesting is politically, there seems to be an evolution on this concept.
Q: Aside from the technical qualifications between these markets, are there other ballpark generalisations that people tend to make? For example, the opinion is or the observation is that emerging markets tend to be more volatile, more high beta than a developed market, can those assumptions also be drawn when you are looking at the two clusters?
Matthews: Yes, generally speaking they are. Why is that? One very simple reason is because they are less developed countries therefore they have ' their middle class as a percentage of a total population is smaller and therefore the amount of domestic individuals investing in the stock market is lower in percentage terms than it is in developed marekts because there isn't as much of a middle class yet. So in the absence of a large domestic investor base or atleast I should say a fairly sophisticated one, there are big domestic investor basis obviously in places like China and India but they tend not to be very sophisticated, they tend to be momentum followers and speculative as opposed to investing in stocks for the long-term.
What I wanted to say is in the absence of that, foreign institutional investors assume a much greater directional influence on the market and India would be probably the best example I think in the emerging market space.
Q: We have talked about emerging markets, developed markets, the BRIC universe but the one which has suddenly become on top of mind is the MENA region, what region of the world does that capture and why has it become so important especially when we are talking about crude oil and the implications on the equity market?
Oliver: The MENA region is essentially the Middle East (ME) and North Africa so it is countries like Libya, Egypt, Nigeria, Tunisia, that part of North Africa and ofcourse the Middle East, which includes Saudi Arabia and the Gulf states. Obviously that part of the world has always been very important because it is a key supplier of global oil but in recent months, it has hit the headlines because several countries in that region have seen political unrest starting in Tunisia, which has been led to problems in Egypt and then ofcourse more recently in Libya and although Tunisia and Egypt aren't that significant in terms of world oil supply, Libya certainly is and Libya has broken at a civil war which has affected supply world oil that ofcourse has pushed up oil prices.
There has also been tensions in some other gulf states into a less degree in Saudi Arabia so as a consequence, investment markets have been looking at that part of the world recently as to gauge to how far oil prices might rise and whether that in turn might adversely impact global economic growth.
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