Mataprasad Pandey’s Post

Which countries are emerging markets? Turns out the answer is not as simple as first thought. For the financial markets there are several different indices and classifications for equities, govies and corp bonds, each with a different list of countries in them.

There are 98 countries covered by the main EM Equity and EM Debt indices. Only 12 countries appear in all the major indices and India 🇮🇳 is set to join them to become lucky number 13. This graph is admittedly maybe more confusing than clear. But that is kind of the point! Navigating the enormous world of Emerging Markets is complex. Depending on how robust a financial market is, and how index providers classify these things, different countries fit into different places in the definition of developed, emerging or frontier, and whether they are big enough and accessible enough for inclusion into fixed income indices. Overall 98 countries make it in there somewhere. From the large and more advanced Korea (considered developed by some), to the small and less developed Gabon. Only 12 of those make the 'Super 12' that tick all the boxes to get included in EM Equity, EM Hard Currency Government Bond, EM Local Currency Bonds and EM Corporate Bond indices. India is set to join them at the end of June 2024 when it is added to the main Local Currency index. It is a massive asset class in its own right and so it will build to a 10% weight over the coming months in the index it joins, providing a natural tail wind of inflows by investor that track the benchmark. Like the graph? Its a Euler diagram that I created for an upcoming lecture I am giving at Johns Hopkins university. You may recall seeing Euler diagrams around the time of Brexit when we all became 'experts' in Europe's complex web of unions, partnerships and trading communities. #macromatters For professional investors only. Capital at risk. For illustrative purposes only.

Market Sentiment about MSCI MALAYSIA in a Nutshell (1/2) The financial sentiment surrounding **MSCI Malaysia ETFs** can be broken down into three main camps: the **optimists**, the **pessimists**, and the **neutrals**. Each group has its own distinct perspective on the future outlook, and the market narrative is constantly evolving based on both local and global developments. Here's an approximate breakdown: 1. Optimists (40%) The **bullish** crowd sees a lot of untapped potential in the MSCI Malaysia Index and ETFs. These investors are largely driven by Malaysia’s: - Strategic position in Southeast Asia: Optimists believe Malaysia’s location makes it a key beneficiary of the **global trade recovery** and a potential hub for **supply chain diversification** away from China. - *Solid banking sector: Despite concerns, many see Malaysia's financial institutions as **stable and well-capitalized**, poised to benefit from regional growth. Investors view the **dividend yields** of major banks as attractive in a low-interest-rate environment. - Rebound in commodities: With **oil prices recovering** and palm oil demand remaining strong, optimistic investors are betting on a **resource-driven comeback**. They believe Malaysia’s commodity exports will continue to underpin economic growth. - Resilient consumer demand: Many are optimistic about **domestic consumption** picking up as Malaysia recovers from the pandemic, with a growing **middle class** supporting key sectors like consumer goods, telecommunications, and healthcare. 2. Pessimists (35%) The pessimistic group remains cautious, if not outright bearish, about the future of MSCI Malaysia ETFs. They point to several risks: - Political instability: The pessimists are concerned about **Malaysia’s unpredictable political environment**, which has seen multiple changes in leadership in recent years. They worry that ongoing **political uncertainty** could deter foreign investment and stall economic reforms. - Currency risk: A common bearish argument is the **weakening Malaysian Ringgit**, which could hurt foreign investors’ returns. If the Ringgit continues to face downward pressure, it could further **erode the value of the ETF** for international holders. - Commodity dependency: Many in this camp believe Malaysia’s reliance on **oil and palm oil exports** is a liability. They argue that any **downturn in commodity prices** or stricter environmental regulations (especially regarding palm oil) could heavily impact the country’s GDP and, consequently, the MSCI Malaysia Index. - Underperformance relative to peers: Pessimists argue that Malaysia is lagging behind other emerging markets like **Vietnam, Indonesia,** or **India**, and see better growth prospects elsewhere in Southeast Asia. They question whether Malaysia is losing its competitive edge. (2/2)---->(https://lnkd.in/d298HBCX)

Inclusion of Indian Government Bonds (IGB) in JP morgan emerging markets bonds indices from friday 28th 2024 1) Will spread over 10 months till March 31, 2025 and weightage will be increased to 10%. 2) Higher inflows will help India to manage its external finances and boost foreign exchange reserves and the rupee. 3) Total 23 IGBs will be included to meet index eligibility criteria having notional value of 27 lakh crore or $330 billion. 4) Only IGBs FAR (Fully Accessible Route) bonds will be index eligible. 5) To be eligible, IGBs having notional outstanding of $1 billion and 2.5 years remainig maturity is required. 6) Since the announcement of Inclusion $10.4 billion inflows have been seen. 7) Impact of Inclusion - Foreign money will flow in Indian debt markets - Help to finance fiscal and current account defecit - Enhance the liquity and diversification of ownership base of gsec - Cost of borrowing will go down as trust will go up - Due to inflow of $25 to $30 billion, chances of inflation going up is high 8) After JP morgan, Bloomberg will also include Indian bonds in Bloomberg Emerging Markets local currency Government Index from Jan 31 2025. FAR bonds will be included in it with initial weightage of 10%. Team Kautilya

(Bloomberg) -- Foreign investors are turning cautious on emerging Asian bonds as the rising cost of hedging eats into returns. Their waning global interest in the region’s local currency bonds is evident in markets like South Korea and Malaysia where inflows have either reversed or slowed. That comes as a measure of local currency forward points in seven emerging Asian currencies rises on average 0.6 standard deviations above the twelve-month average, in a sign that it has become more expensive for investors to swap dollars for the local currency. Forward points are expected to rise further, with the Federal Reserve seen cutting interest rates this year, further eroding returns on dollar-hedged investments. Asia FX forward points have edged higher since November due to lower volatility as well as reduced depreciation concerns for Asian currencies, said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. Nonetheless, it’s important to note that the forward points still remain negative in absolute terms, he added. Malaysian bonds have seen a net foreign bond outflow of $263 million in the first two months of the year, according to most updated data, after a $3.8 billion inflow in 2023. Global inflows into Korean bonds have fallen to $6.4 billion so far this year, after a $60 billion inflow in 2023. Investors will also need to be mindful of currency policies in the region. Yuan forward points surged 94 points on Friday after the People’s Bank of China’s weaker currency fixing fanned speculation it was loosening its tight grip on the yuan. That’s before forward points pared the rise as the central bank reaffirmed its currency support with stronger-than-expected reference rates this week. Rate Gap Focus Local forward points turned favorable for global investors in 2022 when the Fed hiked rates much more aggressively than emerging Asian nations, resulting in a wide rate gap between the two. That had made it attractive for foreign investors to borrow Asian currencies in exchange for the greenback.  Global funds are expected to lose that advantage with the Fed forecast to trim rates this year. For example, Malaysia’s three-year bonds offer a return of around 5.70% now versus an average of 6.20% in October to dollar-based funds that hedge against the ringgit’s moves using three-month currency forwards. Moreover, the US rate premium over emerging Asia economies will narrow if the Fed moves sooner than regional policy makers on rate cuts. Beginning in June, the Fed is expected to cut rates by a cumulative 75 basis points this year, while central banks in South Korea, Malaysia and Singapore will not be as dovish, RBC’s Tan added. While “Bank Indonesia and the Reserve Bank of India could certainly try to match the Fed in terms of cuts, I think they would start out cautiously,” he said.