Implications of MSCI's emerging market rebalancing

The MSCI world index will announce overnight whether Korea and Taiwan will be reclassified from emerging markets to developed markets, with implications for both active and passive managers.

Kerry Series, chief investment officer of boutique Asian equities manager Eight Investment Partners, is hopeful the rebalancing will occur.

With Korea and Taiwan being available to developed market investors the increased demand for those companies could have a positive impact on valuations, he said.

Because Korea and Taiwan make up about 25 per cent of the emerging markets index it would reduce the opportunities for emerging markets managers, hence reducing the diversity of that index given the weighting of technology stocks in those two countries, he said.

However other emerging markets such as China would benefit as their weightings increase, he added.

State Street Global Advisers head of exchange-traded funds for Asia Pacific, Frank Henze, said the move has been on the cards for several years and if it does happen it won’t come as a surprise to investors.

Many investors in Asia already do not view these two markets as emerging, although a reclassification would mean a lot of money on the move with regards to readjusting portfolios, particularly for index and exchange-traded fund (ETF) investors, he said.

It would also have implications for other mandates and for active investors who invested in that universe, although in different proportions, he said.

A potential move would likely be less of an issue for larger houses who will have developed in house strategies to manage the shift, he added.