For the past couple of weeks, portfolio managers at a number of the world’s biggest funds have been pondering a report by Goldman Sachs. Some of them, opting to read between the lines, suspect its 23 pages portend a great deal more than they say out loud about geopolitics, China and the contingency plans forming in some heads.
The question posed in the paper is whether China’s enhanced and now bulging weight in the benchmark MSCI Emerging Market index justifies breaking the world’s second-biggest economy out of that category and creating a separate “EM ex-China” asset class for the asset management industry to work with. A global squad of seven Goldman strategists have attacked this technical and intriguing question, and present a compelling case for the change.
Fund managers who have read it say the paper encapsulates a debate that was just beginning to happen on the margins, but was likely to accelerate sharply in coming months and years. The ramifications of such a change, which would directly or indirectly affect more than $10tn worth of assets benchmarked to various MSCI indices, are big enough to mean that the shift would not be a simple one. So if you think it is the probable point of arrival in three to five years’ time, said one Hong Kong-based fund manager, the discussion needs to point in that direction now and the index-makers need to know that the momentum is real.