UBS sees US$121b of EM flows amid ‘seismic’ index shifts

No major strategy was safe last month. October

HONG KONG: Investors should prepare for unprecedented opportunities in emerging markets over the next year as new entrants including Saudi Arabia and China’s domestic shares are added to global indexes in what UBS Group AG calls "relatively seismic shifts.”

The world’s largest index providers such as London Stock Exchange Group Plc unit FTSE Russell, MSCI Inc., and S&P Dow Jones Indices are due to review a series of indexes to take on the so-called SACKs -- Saudi Arabia, Argentina, China onshore shares (also called A-shares), and Kuwait, David Rabinowitz, UBS head of Asia-Pacific market structure, wrote in a report.

The rejig will likely result in some $121 billion in active and passive fund flows shifting across the emerging-market universe, according to UBS.

Investors will look to “position themselves, align their portfolios and take account of relatively seismic shifts in emerging market index weights,” Rabinowitz said. 

“With over $500 billion of passive fund flows alone tracking the EM segment across MSCI, FTSE and S&P, we expect liquidity shifts to occur.”

The anticipated flow underscore attempts by nations like Saudi Arabia and China to introduce reforms as they open up to global investors, as well as the role of central index compilers in stock selections, with trillions of U.S. dollars tracking major benchmarks. 

It also highlights a shift away from the BRICs -- Brazil, Russia, India, China (shares traded offshore) and South Africa -- whose positions in emerging-markets benchmarks are now well entrenched.

By May 2020, when the last of the current spate of index reviews takes place, $37 billion in passive fund flows alone will have gone into SACKs assets, UBS estimated.

Active fund managers will also be likely forced to participate to “at the very least, maintain current tracking error levels” to the tune of about $84 billion in incremental active flows over time, UBS predicted.

Among the losers, the biggest active and passive outflows, in aggregate, may be seen among Hong Kong and American Depositary Receipts of Chinese stocks ($34.5 billion), South Korea ($15.7 billion) and Taiwan ($12.8 billion) with India, Brazil, South Africa and Russia also likely impacted, according to UBS.

Here’s a complete list of the key dates investors should mark down on their calendars:


* Feb: MSCI to announce details of next stage China A-share inclusion

* March/April: first and second tranches of Saudi Arabia inclusion into FTSE indexes

* May: MSCI to make first tranches inclusions of Saudi Arabia, Argentina to indexes, possible additional weighting of China A-shares

* June: third tranche of Saudi Arabia inclusion, and first tranche of China A-shares into FTSE indexes

* Aug: second tranche of Saudi Arabia inclusion, and further possible increase of China A-shares into MSCI indexes

* Sept: China A-shares and Kuwait added to S&P indexes, fourth tranche of Saudi Arabia and second installment of China A-shares into FTSE indexes


* March: fifth tranche of Saudi Arabia and third tranche of China A-shares into FTSE indexes

* May: possible full inclusion of Kuwait and third potential tranche of China A-shares into MSCI indexes. - Bloomberg


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