Sharpe contrast

The world’s emerging equity markets have always played host to ‘hot money’ and the rising liquidity of these markets coupled with the growth of exchange trade funds (ETFs) and other passive approaches has only exacerbated the problem. Hence, overseas investors who select to invest via the MSCI Emerging Market Index are not only subject to the increased country effect that is a prominent feature of emerging market (EM) equities, they’re also vulnerable to the heightened political sensitivity that attaches to the largest stocks.

A good example of this is the Brazilian oil giant Petrobras. Its fortunes have see-sawed wildly this year at the prospect of a replacement for President Dilma Rousseff and its role in a corruption scandal linked to Rousseff’s Workers Party. The volatility of its share price reflects this.

Capturing the key themes

Another important consideration is the fact that the large cap index is dominated by financial, commodity, energy and heavy industrial stocks. Indeed, financial and commodity stocks alone account for just under half the large cap market. The larger of the two, financials, is dominated by monolithic quasi-state entities such as People’s Bank of China, Sberbank of Russia or Brazil’s Itaú Unibanco. Meanwhile, the market’s commodity stocks, like those elsewhere, are subject to the ‘super-cycle’ and the prospect of slowing demand from a rapidly cooling Chinese economy. This means that neither sector offers investors access to the key investment themes that are most appealing to western investors.

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Supporting documents

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