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MSCI is revamping the rules for inclusion in the widely followed MSCI Emerging Markets index. MSCI plans to cut the weight of stocks with unequal voting rights. If implemented, the rule would increase the weight of Asian stocks in the index to over 75% while lowering the weight of Latin American stocks to about 11%. The biggest country weights in the MSCI Emerging Markets index are China, South Korea, and Taiwan.
Like most market capitalization weighted indices, the MSCI Emerging Markets index is top heavy. The top five countries (out of 24) account for 73% of the weight of the index. If you are buying Emerging markets stocks, your fortunes are going to rise and fall with the prospects of the Chinese, Korean, and Taiwanese economies. Steve Johnson writes at FT:
Latin America’s dwindling weight in the closely followed MSCI Emerging Markets equity index is set to plunge still further under proposals from the US index group.
MSCI has proposed adjusting the weighting of companies in its global index family to reflect the proportion of voting power held by freely floating stock.
The move would cut the weighting of companies whose founders maintain control by issuing publicly listed stock with low, or even non-existent, voting rights — a powerful punishment in an investment world increasingly driven by index weightings.
Read more here.
Jeremy Jones, CFA
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