Markets

UBS Sees $121 Billion of EM Flows

Amid `Seismic' Index Shifts
By Benjamin Robertson and Eric Lam
February 11, 2019, 11:24 AM GMT+3

So-called SACKs will be focus of global benchmark compilers

FTSE Russell, MSCI among index reviews slated by May 2020

Investors should prepare for unprecedented opportunities in emerging markets

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
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 $121 billion in active and passive fund flows
shifting across the emerging-market universe, according to UBS.

Investors will look to “position themselves, align their portfolios and take
account of relatively seismic shifts in emerging market index weights,”
Rabinowitz said. “With over $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 U.S. 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
emerging-markets benchmarks are now well entrenched.

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

Active fund managers will also be likely forced to participate to “at the very least,
maintain current tracking error levels” to the tune of about $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
($34.5 billion), South Korea ($15.7 billion) and Taiwan ($12.8 billion) with India,
Brazil, South Africa and Russia also likely impacted, according to UBS.

Passive Fund Inflow Predictions

More than $500 billion of passive money tracks major emerging market indexes
 FTSE Saudi Arabia MSCI Saudi Arabia MSCI Argentina FTSE China A-Shr
MSCI China A-Shr MSCI Kuwait
$ 15 B

Source: UBS
Note: Details of final inclusion weighting of China A shares and Kuwait into MSCI Indexes is
pending approval from the index provider

Here’s a complete list of the key dates investors should mark down on their
calendars:

2019

Feb: MSCI to announce details of next stage China A-share inclusion

March/April: first and second tranches of Saudi Arabia inclusion into FTSE
indexes

May: MSCI to make first tranches inclusions of Saudi Arabia, Argentina to

indexes, possible additional weighting of China A-shares

June: third tranche of Saudi Arabia inclusion, and first tranche of China A-
shares into FTSE indexes

Aug: second tranche of Saudi Arabia inclusion, and further possible increase
of China A-shares into MSCI indexes

Sept: China A-shares and Kuwait added to S&P indexes, fourth tranche of
Saudi Arabia and second installment of China A-shares into FTSE indexes

2020

March: fifth tranche of Saudi Arabia and third tranche of China A-shares into
FTSE indexes
May: possible full inclusion of Kuwait and third potential tranche of China A-
shares into MSCI indexes

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