UBS sees RM493b of EM flows amid ‘seismic’ shifts


HONG KONG • Investors should prepare for unprecedented opportunit ies in emerging markets (EMs) over the next year as new entrants including Saudi Arabia and China’s domestic shares are added to global indexes in what UBS Group AG calls “relatively seismic shifts”.

The world’s largest index providers such as London Stock Exchange Group plc’s unit FTSE Russell, MSCI Inc, and S&P Dow Jones Indices are due to review a series of indexes to take on the so-called SACKs — Saudi Arabia, Argentina, China onshore shares (also called A-shares) and Kuwait, David Rabinowitz, UBS head of Asia-Pacific market structure, wrote in a report.

The rejig will likely result in some US$121 billion (RM492.75 billion) in active and passive fund flows shifting across the EM universe, according to UBS.

Investors will look to “position themselves, align their portfolios and take account of relatively seismic shifts in EM index weights,” Rabinowitz said. “With over US$500 billion of passive fund flows alone tracking the EM segment across MSCI, FTSE and S&P, we expect liquidity shifts to occur.”

The anticipated flow underscore attempts by nations like Saudi Arabia and China to introduce reforms as they open up to global investors, as well as the role of central index compilers in stock selections, with trillions of US dollars tracking major benchmarks.

It also highlights a shift away from the BRICs — Brazil, Russia, India, China (shares traded offshore) and South Africa — whose positions in EMs benchmarks are now well entrenched.

By May 2020, when the last of the current spate of index reviews takes place, US$37 billion in passive fund flows alone will have gone into SACKs assets, UBS estimated.

Active fund managers will also likely be forced to participate to “at the very least, maintain current tracking error levels” to the tune of about US$84 billion in incremental active flows over time, UBS predicted.

Among the losers, the biggest active and passive outflows, in aggregate, may be seen among Hong Kong and American Depositary Receipts of Chinese stocks (US$34.5 billion), South Korea (US$15.7 billion) and Taiwan (US$12.8 billion) with India, Brazil, South Africa and Russia also likely impacted, according to UBS. — Bloomberg