EM may not mean what you think it means

At Tricio we have deep experience in emerging markets and regularly provide insights and risk/reward analysis for clients in our research publications. The last few decades has seen interest in EM markets increase and the financial industry has responded. There are many relatively inexpensive funds that track key indices, providing a lot of fee and performance competition for specialist fund managers. We like low fees, but our client research regularly reminds our readers that EM benchmarks may not give you the exposure that you think you are getting.

Our deep experience in EM comes through both personal experience (we travel a lot, I grew up mostly in Latin America and Africa etc.) and previous employment at HSBC, Bank of America, the Economist Intelligence Unit, Standard Chartered and American Express Bank*. Coming up with models for country risk analysis, key commodity, interest rate and FX research and being able to manage trading risk in these was part of our jobs.

So why a blog about EM now? The uptick in financial media reporters interviewing the great and the good of the fund management and banking world that espouse their favourable view of EM exposure is noticeable this year. This is great, but this blog is just a reminder to check what the label says on the back of the tin.

For example, the MSCI EM indices are used to benchmark over $1.5 trillion in AUM according to MSCI. When they announce their decision to include a country in their equity or bond indices, markets move. Their main EM equity index is USD based, so FX trends have a big impact on returns. More importantly, as the chart from MSCI below shows, the index has a China weight of 26.6%, Taiwan weight of 21% and South Korea weight of 15.6%. These may not be considered as ‘emerging markets’ by some investors. The big stock exposure is to Taiwan Semiconductor (12.49%), Samsung Electronics (4.74%), Tencent (4.47%), Alibaba (3.34%) and SK hynix (3.1%) for a total of 5 shares making up over 28% of the index weight. So if an investor is seeking shelter from AI exposure and decides to put money to work in EM, check the fund and holdings.  Consider more specific exposure. This could be country specific (India, Brazil etc.) or regional (LATAM for example).

For further information on how Tricio’s research insights and our ‘Ask a Buddy’ CIO service helps our clients, please contact us at info@tricio-advisors.com.

Gerry Celaya

Chief Strategist

*American Express Bank, which was purchased by Standard Chartered, was a small USD clearing bank, commercial bank and private bank owned by American Express. The bank had a large exposure to EM risk. This was in the form of loans and financial services for SME’s and family offices through Asia, Europe, Africa, the Middle East and Latin America. A relatively big letter of credit business for firms around the world and interbank counterparty services for banks in Africa, Turkey, Eastern Europe, Asia, Latin America, Europe, the US and major money centres. John Calverley, Chief Economist at Tricio, ran the economics team at AEB London which provided macro outlooks, research publications and speaking engagements for every part of the bank’s operating units and also did country risk analysis for the credit team. James and I worked in the wholesale banking unit which supported private banking, correspondent bank relationships and the lending side of the bank with trading rooms in Taipei, HK, Singapore, Seoul, Jakarta, Mumbai, Dhaka, London and NY.