Wednesday, December 23, 2020

EM stock index now more tech-heavy than S&P 500

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Technology stocks now account for a larger slice of the main emerging markets equity index than Wall Street’s S&P 500, the first time this has happened since August 2008.

The reversal symbolizes a radical reshaping of the MSCI Emerging Markets index, which in 2007 had a 33 percent weighting to commodity-related stocks in the materials and energy sectors and just 10 percent to technology.

EM stock index

This relationship has been turned on its head, with tech stocks now accounting for 23 percent of the MSCI index, comfortably above the 14 percent weighting of commodity stocks.

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However, in many ways, this represents more of a return to the way things were before the commodities supercycle of the early 2000s rather than an unprecedented structural shift.

Tech stocks outweighed commodity-related ones in the MSCI EM index in 2000, as the first chart shows, before the tech bust and commodity boom unfolded. However, the tech sector’s lead now is significantly greater than it was then.

The technology sector’s absolute weighting in the EM index has also risen beyond its peak during the dot-com boom, of 21.7 percent in April 2000.

And, notably, tech companies are now more prevalent in the MSCI than the S&P 500, where their weighting is just 21 percent, as the second chart shows, despite the fabled “Fangs” rally of 2015 when Facebook, Amazon, Netflix, and Google (now known as Alphabet) each gained more than 30 percent.

As Jan Dehn, head of research at Ashmore Investment Management, an emerging markets house, notes, seven of the 10 largest stocks in the MSCI index are now tech companies: Chinese trio Tencent Holdings, Alibaba and Baidu, South Africa’s Naspers(whose prime asset is a 34 percent stake in Tencent), South Korean duo Samsung Electronics and TSMC, a chipmaker, and Taiwan’s Hon Hai Precision Industry, better known as Foxconn.

Tencent temporarily overtook China Mobile to become the most valuable company in Asia for the first time earlier this week, with a $257bn market capitalization.

Tencent’s rise symbolizes how the composition of the technology companies in the MSCI had changed markedly from October 2002, when the index’s tech lead over the S&P 500 was at its greatest.

The sector was then dominated by companies in the semiconductor and electronic equipment subsectors, such as Samsung, TSMC, United Microelectronics, and Hon Hai, alongside a swarm of Taiwanese hardware groups Asustek Computer, Quanta Computer, Compal Electronics, Lite-On Technology, and Acer. Only one internet company, Check Point Software of Israel, was featured.

Today, although a few of those names remain, the index is dominated by internet groups, with Naver and Netease’s likes alongside Tencent, Alibaba, and Baidu. The rise of mainland China, at the expense of Taiwan, is unmistakable.

“Perceptions about emerging markets usually lag behind reality, sometimes by decades. Nowhere is this more evident than in the perception about EM equities, where the consensus opinion remains that the MSCI index is primarily commodities and cyclical play. This view is outdated and wrong,” says Mr. Dehn.

Ali Unwin, chief technology officer at Neptune Investment Management and Neptune’s Global Technology Fund manager, agrees that investors still tend to think of emerging markets as being dominated by sectors such as commodities.




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