FILE PHOTO: Labourers work at a garment assembly line of Thanh Cong textile, garment, investment and trading company in Ho Chi Minh city, Vietnam July 9, 2019. Picture taken July 9, 2019. REUTERS/Yen Duong/File Photo/File Photo
It’s been a long while coming, but the quaintly monikered emerging-market tab might finally be nearing its end – at least for the investment world.
Amundi SA, Europe’s biggest fund manager, has dealt a much-needed blow to the segregation of countries supposedly requiring totally different approaches.
The company noted “the lines between emerging markets and developed markets are increasingly converging”.
The label of emerging markets hasn’t been fit for purpose for decades, but the faux divide between “developed markets” and the rest has persisted more out of inertia than accuracy or utility.
South Korea, which has one of the most sophisticated manufacturing economies in the world, will finally be included in the FTSE Russell World Government Bond Index in April.
Not a moment too soon, with the same to be said about several Central and Eastern European countries that remain classified as emerging markets despite either being in the European Union or practically part of it.
Greece, which is in the eurozone, will not transition from FTSE Russell’s advanced-emerging status to a developed market for nearly another year.
Whether China or India should still be viewed as emerging has become ridiculous.
A wholesale refresh is overdue on what is or isn’t an emerging market – a term coined by a World Bank economist in 1981 to replace Third World – to reflect modern reality, particularly with the ever-growing bloc of BRICS-plus countries.
This is not down to de-dollarisation per se, or flight into other asset classes like gold or crypto, but because, broadly, most economies are simply doing a lot better, both in management or controlling inflation but also in how currency reserves and monetary policy has been professionalised.
There’s no separate set of skills that a trader pricing Brazilian bonds needs versus a US Treasury bond dealer, and vice versa. It’s the same with equities and most securities.
Of course, local knowledge in each currency is required always and everywhere but the basic principles are the same.
A rejig across the buy and sell-side makes sense to more accurately reflect smaller, developing markets from those now functioning in all intents and purposes as sufficiently liquid, regulated securities. It’s just as tricky lumping in genuinely developing countries to a one-size-fits-all bucket.
Vietnam will graduate in a year from the FTSE Russell Frontier Market category into its secondary emerging-market category (which includes China and India). Yet the country has sufficiently sophisticated manufacturing exports to have the Trump tariff eye of Sauron fixate on it.
Obviously, there are sound reasons that make classifying funds complicated, such as investor-access restrictions, but these shouldn’t pigeonhole an entire economy.
These upward reclassifications understandably take time but can be a huge boost for inward investment. The FTSE Russell upgrade may be worth upwards of US$6bil for Vietnam. But the real goal is to secure MSCI reclassification, which guides decisions by funds totalling US$1.8 trillion, by the end of the decade.
The World Bank estimates this could be worth US$20bil to the South-East Asian country.
The homogeneity of financial markets globally is a hugely promising outcome of how central banks and finance ministries have all learned from a succession of brutal crises in the past 30 years.
Perhaps all those talking shops and symposiums have had some use after all, and not just for local catering companies.
If the Argentinian peso is having a bad day, no longer does it trigger Latin American contagion.
Idiosyncratic risk is always prevalent, as a nervous glance at Turkish inflation data always precipitates, but it doesn’t have anything like the spillover effects of old.
A weaker US dollar is having benign effects across many countries that find their currencies umbilically linked to the world reserve currency. The majority of commodity trade is denominated in dollars.
It’s been a banner year for emerging markets, so perhaps a reevaluation is now deserved. When the US sneezes, no longer does half the world catch a cold, so there’s less need for trading of securities to be artificially divided either. — Bloomberg
Marcus Ashworth writes for Bloomberg. The views expressed here are the writer’s own.
