Emerging markets: Views from the experts
1. MSCI completed the third phase of the 20% partial inclusion of China A-shares in its benchmark indices during November. Following the increase, the MSCI Emerging Markets Index included 472 China A-share companies with a total weighting of 4.1%. If and when all China A-shares are included in the index, they could account for over 16%, bringing China’s total weighting to over 40%. The increased exposure is likely to result in additional inflows in China’s domestic A-share market, which, along with improving liquidity, could provide better market accessibility to a wider range of companies in structural growth sectors such as health care, technology and financials.
An aging population and rising health care costs should drive demand for health care, including services provided in facilities, such as hospitals and clinics. Technological advancements and infrastructure development—including 5G and Internet of Things— are important investment themes.
We believe the financial sector also stands to benefit from structural reforms as financial institutions are playing an increasingly important role in the efficient allocation of savings and resources.
2. Environmental, social and governance (ESG): We believe that ESG factors can have a material impact on a company’s current and future corporate value and are an embedded component of the rigorous fundamental bottom-up research our team conducts.
When potential concerns arise, we believe engaging is in the best interest of our shareholders and will lead to better returns.͏
3. We believe that, at its core, corporate governance determines how well companies are able to operate in the longer-term and is in the interests of all shareholders. Take Russia, for example. Most investors are unlikely to associate Russia with governance excellence. Yet many Russian companies have taken the initiative to set higher governance standards and promote shareholder value. Indicating the shift in corporate mindsets, the dividend payout ratio in Russia increased from 21.8% at end-2013 to 33% at end-2018. Despite this, Russia remains one of the most undervalued markets globally, trading at a forward price-to-earnings multiple of 6 and a dividend yield of 7%, as of end-November.