Equity Indices’ Consumer Consummation

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With both core and frontier stock markets up double-digits through mid-year index providers like S&P Dow Jones have rolled out fresh benchmarks with traditional ones “quite limited” for investment outperformance. Broad gauges are “highly correlated” as S&P’s BMI beat the MSCI by 30 percent over the past 15 years with a 435 percent gain. South Korea is excluded from the former as a developed market while its 15% weight with lagging results has been a drag on the latter. The two also differ since MSCI has no small-cap stocks, often consumer and health care-related, which have advanced 170 percent more than mid and large-cap peers concentrated in banks and exporters over the period. The gap has been particularly wide the past decade as personal discretionary and staples outpaced energy listings by 80 percent, with a lead across all regions. Among the main geographies Latin America and Europe have big natural resource exposure as in Brazil and Russia, while Asia features information technology. To better capture the consumer play Dow Jones has introduced a global Titans 30 index with top representation from South Africa, China, India and Mexico. Korean and Taiwanese firms are outside since their sales are predominantly to industrial economies. Its volatility-adjusted return exceeded overall industry measures back-tested to the early 2000s, and dozens of additional dedicated country, sector, and size indices are available for sophisticated managers, according to the report.

Private equity has also evolved as emerging market allocation increased nine times since 2005 to over $550 billion at end-2016, a Preqin industry survey reveals. Fundraising last year was below 2015, with buyout and venture capital deals moving in opposite directions. Despite major country economic and world geopolitical challenges long-term middle class and young working class growth remain drivers even if returns lag Europe and North America vehicles. Funds have begun to distribute more capital than called, with net cash flow at records. In the past five years activity has slowed from the peak when EM was half the PE total. In 2016 it was 12 percent with almost 200 fund closes for $45 billion. Through 2017 so far the numbers are 60 and $15 billion, respectively, for one-fifth of global raising. Asia has been 80 percent of the sum the last decade followed by Latin America, and diversified mandates are just 5 percent. By category growth and venture capital funds dominate in volume, but buyout types have attracted 40 percent of the action in recent years. Only 15 percent of general partners could reach completion within six months, and three-quarters are based in developing economies for easier analysis and marketing. Four out of the five largest launched since 2008 are from China with combined $50 billion in commitments. The investor base comprises almost 900 institutions, over one-quarter from Greater China, and banks, corporations and portfolio managers are the majority with venture capital preference. Funds of Funds apply more in developed markets, and according to a survey of 200 respondents China and India will be the favored near-term destinations, while Central Europe and the Middle East will stay sidelined. This April phone company Didi Chuxing set a venture mark with a $5.5 billion transaction, with mainland and foreign partners ringing the right tone.

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