If you’re a fund manager invested in emerging-market equities, chances are
you’re obsessed with the MSCI
Emerging Markets index. The index doubles as the very definition of which countries
count as "emerging markets", and which have "graduated"
to developed-country status. Portugal graduated in 1998, Greece in 2001.
Which countries will graduate next? That’s actually an easy question. The answer
is Israel, Taiwan, and Korea. The tough question is when they will graduate.
Because when they do, the index will change – a lot. In fact, it will
lose fully one third of its market capitalization overnight.
In other words, if you buy any fund which benchmarks the MSCI-EM, right now
you have a lot of exposure to these three rich countries. It might not be long,
however, before you find yourself with much more exposure to the likes of Argentina,
Hungary, and Peru. Just a friendly warning.