South Africa
Michael Metelits
International research organisation Morgan Stanley Capital International (MSCI) plans to drop Malaysia from its emerging markets free index on November 30, a move which could benefit South Africa.
MSCI’s move will increase the weighting of other emerging markets in the index. South Africa has the second largest weighting in the index at 11,8%, which will increase to 12,2% when Malaysia is excised.
The index is used for benchmarking performance of emerging markets and asset allocation for those funds still investing in the troubled sector. By tracking the performance of securities, MSCI provides guidelines to measure gains and losses over time. This enables managers of emerging market funds to gauge profit and loss and determine the risks and benefits of staying in a particular country.
The relative weighting of the index is a measure of MSCI’s estimate of the investment worthiness of a country’s capital market. Portfolio managers often distribute their funds with reference to MSCI’s weightings. So an investor might put 14% of her or his emerging market money into Brazil (the largest single constituent of the index) and 12% into South Africa.
Increased weighting for South Africa may mean an increase in funds flowing to our economy if investors and fund managers continue to use the weightings as a guide. Roughly $100- billion is still invested in emerging markets, and the new weighting could lead to an additional $400-million for South Africa.
Malaysia will be excluded from the index as a result of re-imposing capital controls in September, and limiting foreign investment by prescribing a one-year “holding period” on foreign funds. Presumably exclusion from the index and its attendant capital flows is meant to punish Malaysia and warn other countries not to follow suit.