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Investing in Emerging Markets

Technical Note Series No. 1
CHARACTERISTICS OF EMERGING MARKETS
Today, roughly 30 countries are considered to be in transition to higher levels of

economic development and have hence earned the title “emerging markets” from the
International Finance Corporation (IFC) of The World Bank. Initially (in 1981) the IFC
emerging market index included stocks of publicly traded companies from nine countries. By
2002, the total number of countries covered in the IFC emerging market indices had reached 33.
Standard & Poor’s acquired the IFC indices in January 2000, and they are now known as the
S&P/IFC indices.1
Investor interest in emerging markets has grown over time. Before 1980, little capital
flowed into these markets due to the lack of financial products and services available to foreign
investors and the perceived high market risk and volatility. Beginning in 1981, private portfolio
investment in the emerging markets began to grow. During the first half of the 1990s, the
privatization and economic liberalization that took place across emerging market countries
substantially enlarged the set of emerging market securities available to foreign investors, who
thereby developed a strong and decisive interest in them for portfolio investments. Net portfolio
inflows to emerging markets peaked in 1994 at $113 billion, only to decrease sharply in the
following years, mainly due to the widespread financial turmoil that affected these markets (the
“Tequila Effects,” kicked off by the devaluation of the Mexican peso). The purpose of this
technical note is to describe some key characteristics of emerging capital markets and compare
them with those of developed and less-developed, or frontier, markets.
Although other emerging market indices are available (e.g., Morgan Stanley’s Capital
International [MSCI] index), the S&P/IFC cohort is used in this technical note, because it
1
Greece and Portugal were included in the list but were recently reclassified as developed markets.
This technical note was compiled by Richard Hoyer-Ellefsen under the supervision of Wei Li. It is an adaptation of
content found in Robert F. Bruner, Robert Conroy, Wei Li, Elizabeth F. O’Halloran, and Miguel Palacios
Lleras, Investing In Emerging Markets, (Charlottesville, Virginia: The Research Foundation of AIMR, 2003). A
companion multimedia case is available on CD-ROM. Copyright © 2004 by the University of Virginia Darden
School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.
This document is authorized for use only in SERGIO GODOY's 2019 Mercados Financieros Emergentes(Opt 1Q) at Pontificia Universidad Catolica Chile (PUC-Chile) from Feb 2019 to Jul
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includes a broader set of countries than competing indices. S&P/IFC considers a market to be
“emerging” if it meets at least one of the following criteria:2
1. It is in a low- or middle-income country, as defined by the World Bank, and

2. Its investable market capitalization is low relative to its most recent gross domestic
product (GDP) figures.
In contrast, S&P/IFC defines3 a market as “developed” if it is in a country where gross

national product (GNP) per capita exceeds the World Bank’s upper income threshold for at least
three consecutive years and the investable market capitalization-to-GDP ratio is in the top 25%
of the emerging market universe for three consecutive years.
These are very broad criteria that call for the use of some additional defining
characteristics. Among the key dimensions this note will consider are market size, openness,
efficiency, transparency, and liquidity.
Market Size and Openness
Market size
Emerging markets are distinct from both developed and frontier markets along two key
dimensions: the overall size of their economies and the size of their financial markets in relation
to their economies as a whole. As a group, emerging markets are far smaller than developed
markets. Exhibit 1 shows the stock market capitalization, GDP and GNP per capita for the
countries included in the S&P/IFC emerging market indexes, while Exhibit 2 shows the same
data for the top 22 developed countries. Apart from a handful of the largest developed markets,
developed and emerging stock markets have similar market capitalizations on average. The
average GDP of the 22 developed countries comes in at just over $1 trillion, more than six times
the average of the emerging market countries. The difference in GNP per capita between the two
groups is greater still, with the average for the developed countries almost seven times larger
than the average for the emerging market countries.
What sets emerging market countries apart from other small, frontier market countries,
however, is the depth of financial markets. Defined as the ratio of market capitalization to GDP,
market depth is a useful indicator of the level of development in an economy’s financial market.
Exhibit 2 shows that the average market depth in developed countries was equal to one—in
other words, the value of their market capitalization on average was roughly the same size as
their GDP. The market capitalization of emerging market countries, on the other hand, averaged
roughly one-third of their GDP. Exhibit 3 shows, however, that emerging market countries have
2
S&P Emerging Market Indices: Methodology, Definitions and Practices.
3
S&P Emerging Market Indices: Methodology, Definitions and Practices.
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higher market depth than frontier market countries. In fact, market depth is the main distinction
between emerging and frontier market countries. When the investable (as opposed to total)
market capitalization of the two groups is compared, the difference is even larger. (See below for
a definition of “investable” market capitalization.)
Exhibit 4 shows the ranking of emerging and developed markets by the number of listed
firms. Note that, except for a handful of very large developed markets such as the United States,
Japan, and the United Kingdom, developed and emerging markets are quite similar in the number
of listings. But when comparing the size of listed firms across markets, Exhibit 5 shows that,
while developed and emerging markets offer a similar number of listings, on average, developed
market listings have considerably larger market capitalization than emerging market listings.
Market openness
In addition to size, market activity and openness are key dimensions that distinguish
emerging markets. They can be analyzed using the S&P/IFC Global Index and the
Investment Index.
In general, the Global Index of a market is created to be representative of that market. As

such, it includes the most actively traded firms in the market and captures the bulk (e.g., a target
of between 60% and 75%) of the total market capitalization of all listed stocks in that market.
While a substantial majority of a developed country’s publicly traded stocks will make the
Global Index for that economy, on average, only about 18% of the listed stocks within an
individual emerging market do so.4 For example, the Indian stock market had the second largest
number of listed firms in the world with 5,900 stocks, yet had only 130 listed firms included in
the S&P/IFC Global Index.5 Other markets such as Egypt, Korea, Pakistan, Slovakia, and South
Africa also have a large number of listed firms but only a small number of firms traded actively
enough to be included. The firms in the Global Index are bigger and more actively traded, so
they do represent a significant portion of the market capitalization and trading volumes in each
market. In general, Global Indexes of most emerging market countries do meet the usual target
of 60% to 75% of total market capitalization, although there are significant deviations, such as in
the case of Argentina.
However, foreign investors may not be permitted to invest in all the listed companies, and
their ownership stake for a particular stock may also be limited. The Investable Index tries to
capture the global exposure of a market by including those firms and the portion of their market
capitalization that is open to foreign investors. Exhibit 6 provides a summary of “openness” to
foreign investors by country. Note that only 18 of the 33 markets listed as emerging markets are
100% open to foreign investment. The remaining 15 markets are either closed to foreign
4
R. Bruner, R. Conroy, W. Li, E. O’Halloran, and M. Palacios Lleras, Investing In Emerging Markets.
(Charlottesville, Virginia: The Research Foundation of AIMR, 2003). Individual economies ranged from a low of
1% for Slovakia to a high of 38% for Morocco.
5
Bruner et al., Investing In Emerging Markets.
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investment or have varying restrictions on foreign ownership. The most common restrictions
include:
 Special classes of shares for foreign owners
 Limits on foreign ownership6
 Limits on ownership held by a single foreign shareholder
 Company-imposed limits that differ from national law
 National limits on aggregate foreign ownership
In addition to taking into account these ownership restrictions, S&P/IFC also considers
three additional criteria for the inclusion of a particular stock’s investable market capitalization
in the Investable Index:
 A stock must have a minimum investable market capitalization of US$50 million.

 The stock must have traded at least US$20 million over the last year.
 The stock must have traded on at least half the local exchange trading days.
For most of the markets classified as “open,” a very high proportion of the firms in the
Global Index pass the screens for inclusion in the Investable Index. In contrast, markets
classified as closed tend to be very exclusionary of foreign investors. In the case of Oman, the
classification of “closed” is literal, as these markets are entirely closed to foreign investors.
Market Efficiency
Market efficiency refers to the degree to which the present price of a security reflects all
the information that is known about the asset underlying the security.7 In an efficient capital
market, new information is quickly reflected accurately in securities prices. It is important when
considering the efficiency of markets to break the concept into its two constituent parts: the
6
Restrictions on foreign ownership of print and/or broadcast media is not uncommon in developed markets.
7
More generally, market efficiency can be parsed into three types: operational efficiency, allocative efficiency,
and pricing efficiency. Operational efficiency refers to the cost that buyers and sellers face in transactions in
securities in the capital market. It may be promoted by competition between underwriters for the primary-market
transactions, between market makers and brokers for secondary-market transactions. It may also be promoted by
competition between exchanges. Allocative efficiency refers to the degree to which investment funds are deployed
to their most productive uses in the economy. The primary economic function of a capital market is to efficiently
allocate capital. In a capitalist economy, the efficiency with which capital is deployed is dependent on the
informational content embedded in securities prices in the capital market. In a pricing-efficient market, prices move
instantaneously and in an unbiased manner to the arrival of any new information. In such a market, the investor is
expected to earn merely a risk-adjusted return from an investment. This technical note addresses only the pricing
efficiency of emerging economies’ capital markets. See Appendix I for a refresher on the various forms of market
efficiency.
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accuracy and availability of information, on the one hand; and the ease with which that
information is employed to affect asset prices, on the other.
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Broad market information in emerging markets
The local risk-free (or more accurately, the default-free) interest rate can be used as one
indicator of a market’s efficiency. The time horizon over which investors are willing to commit
to a specific fixed-interest rate by acquiring available government debts can be used as a proxy
for the time span in which there is timely and reliable information about the future state of the
economy and a general confidence among investors about macroeconomic and political stability.
For example, if a government is able to borrow in the local currency at a fixed rate for 20 years
in the domestic market, one can conclude that there is overall faith in the institutions of that
economy, provided the government does not impose capital controls that limit domestic or
foreign investors’ opportunity sets. (See Exhibit 6 for a description of ownership restrictions
imposed on foreign investors. More relevant here are the restrictions that a government may
impose to limit domestic investors’ ownership of foreign assets. Currently both China and India
impose capital controls that limit domestic residents from owning foreign assets. Malaysia has
also imposed capital controls since 1998, during the Asian financial crisis.) The long borrowing
term of such a market indicates that information is rich and reliable enough to convince investors
to make a high level of commitment. In contrast, a market with only floating-rate government
debt reveals that investors are unwilling to commit to a fixed rate for long periods of time. This,
in turn, may be interpreted as evidence of a lack of faith in the institutions of that economy.
Exhibit 7 shows the longest maturity, fixed-rate, local currency-denominated bond

issued8 between January 2001 and February 2003.9 Out of the 33 emerging markets, only 17 had
any fixed-rate offerings listed. In addition, only 14 of this subgroup had quotes for the long-dated
bond. In contrast, all G7 countries had actively traded, fixed-rate government debt denominated
in domestic currencies.10
One caution is in order when using the availability of long-term government borrowing
as a proxy for market information: the absence of a fixed-rate market does not necessarily mean
the absence of reliable information or sound institutions. A government running a persistent
budget surplus may not need to issue public debt, while another government facing a persistent
budget deficit and macroeconomic instability may be able to issue local currency debts at a high
fixed rate. Rather, the total absence of any borrowing at a fixed rate by a government that needs
financing indicates a lack of information about future prospects. Very high fixed rates for
government bonds signal that investors should be similarly cautious. For example, the yields on
Colombian fixed-rate debt were over 15% during the time frame covered by Exhibit 7, and
yields in the Philippines reached 13%, indicating high-risk levels. Still, the market for debt (even
at these high rates) indicates that investors are able to make informed decisions about the levels
8
http://www.Bloomberg.com.
9
Exhibit 7 was constructed using the Bloomberg news retrieval service. The yield curve information for each
country is retrieved, and the longest maturity bond that was issued between January 2001 and March 2003 is chosen.
The quoted price is the yield quoted on March 7, 2003. If none is listed, the country either had no local currency
bonds listed on Bloomberg or might have had bonds issued before 2001, for which there was not a quoted price. In
either of these cases the assumption is that there was no market for fixed-rate instruments in the local currency.
10
The G7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
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of risk and the premiums needed to justify lending in those markets. The absence of tradable
fixed-rate instruments in countries such as Argentina and Brazil suggests that investors cannot
even make a reasonable assessment of the risk in those economies, and if Argentine and
Brazilian governments were to issue long-term fixed-rate debts denominated in local currencies,
the yields would likely be prohibitively high.
Firm-specific information in emerging markets
In addition to determining the amount of broad market information available in a given

market, there is also a need to determine the availability and relevance of firm-specific
information. One method that can be used to test the amount of firm-specific information
available is to break down the total return variability of firms’ stock prices into “firm-specific”
and “market” components. One would expect that markets with a significant amount of firm-
specific information available would have a substantial amount of the total variance attributable
to firm-specific factors. However, in markets without much reliable firm-specific information,
the only information available is likely to be for the market as a whole. Therefore, in the latter
case, the market component of the total risk should be much higher.
The results of this analysis show that while the proportion of variance attributable to the
overall market is about 15% for stocks listed on the NYSE, the variance attributable to the
overall market in emerging markets varies from a low of about 28% for South Africa to a high of
74% for Sri Lanka. Appendix II shows in more detail how these calculations are performed. The
relatively high variance attributable to the overall market suggests that emerging markets have
much less firm-specific information than what is found in more developed markets. Exhibit 8
ranks markets according to the variance attributable to the overall market. The only real surprises
in the top half of the table are Egypt and Jordan. These are markets where a high proportion of
firm-specific information would not be expected. On the bottom half, the one surprise is Taiwan.
Based on our earlier discussion, this is a market that might be expected to have a substantial
amount of firm-specific information.
Market transparency
Analyzing the amount of information available in emerging markets raises the notion of
the accuracy of that information. The degree to which markets are transparent and competitive
affects investors’ ability to gain information and develop performance expectations. Though all
markets may exhibit varying degrees of transparency, emerging markets are likely to be less
transparent than developed markets. Two indicators have been developed to track the degree of
transparency across countries.
Opacity Index. PricewaterhouseCoopers has constructed an index to measure

transparency along a number of dimensions for 35 countries. This Opacity Index, also known as
the “O-Factor,” is constructed based on data from interviews with CFOs, bankers, equity
analysts, and PricewaterhouseCoopers employees. It is composed of five dimensions: corruption,
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legal, economics, accounting, and regulatory. The O-Factor itself is the simple average of the
index values on each dimension. The index is useful, because the cost of doing business in
countries that are not very transparent on these dimensions is higher, and external investment
capital is more difficult to obtain. Exhibit 9 shows the index values for each dimension and the
O-Factor for the countries it covers. Two surprises on the list include the high ranking of Chile,
an emerging market, and the low ranking of a major developed market, Japan. Chile scores well
on low corruption and on transparent legal and accounting systems. On the other hand, Japan
scores relatively poorly on transparency in both its legal and accounting systems. Overall,
however, Exhibit 9 shows that countries that score high on one factor tend to score high on the
others.
Corruption Perception Index (CPI). Transparency International provides an annual index

that ranks 100 countries on the level of perceived corruption. Emerging markets account for the
top 18 spots of the most corrupt countries on the list, while the 13 lowest corruption countries are
developed nations.11
Testing market efficiency in emerging markets
Empirical evidence indicates that most developed markets, with some variation, exhibit
the “weak form” and “semi-strong” forms of market efficiency. Past prices do not predict future
returns, and asset prices adjust quickly to the release of new information (such as earnings
announcements and dividend changes). But what about emerging markets? Given the relatively
lower availability of market information and higher corruption, one would predict even lower
levels of market efficiency in emerging markets.
Empirical studies support that prediction. Researchers have found evidence of weak-form
market efficiency only in Argentina, Brazil, Chile, China, India, Mexico, South Africa, and
Turkey.12 Other countries have not been studied, or, if they have, the evidence suggests that
markets are not efficient.
Another test for weak-form efficiency is to examine whether past returns predict current
returns in specific markets. In this note we use regression analysis to study a series of markets in
search of evidence of market efficiency.13 The results, shown in Exhibit 10, mirror the findings
of earlier studies: more than half the sample of emerging markets was shown to lack even the
weak form of market efficiency.
11
12
13
In order to test this, the analysis uses weekly local currency return data from January 1995 through December
2002 for all 31 emerging market countries for which data was available. The results are reported in Exhibit 10. If
the market displays weak form efficiency, both coefficients on the one-week lagged return and the coefficient on the
two-week lagged return should not be significantly different from zero.
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Exhibit 11 combines the findings on trading characteristics, the existence of fixed-rate

instruments, the relevance of firm-specific information in market returns, and research testing the
existence of weak-form efficiency to derive a composite “information and market efficiency
score.” In developing the score, a value of one was assigned to each measure that suggested the
market would behave efficiently. The top-scoring markets (i.e., with relatively higher efficiency)
are South Korea, South Africa, Mexico, Taiwan, Slovakia, Indonesia, and India. The lowest-
scoring markets (i.e., comparatively inefficient) are Morocco, Turkey, Russia, and Pakistan.
Investors in foreign markets will want to carefully choose their valuation methods, given the
highly diverse levels of efficiency observed across emerging markets.
Market Liquidity
While all investors are concerned with their ability to get in and out of investments
quickly and at low cost, investors in emerging markets are particularly concerned about the ease
of capital movement owing to emerging markets’ spotty liquidity. Developed markets tend to
offer much greater depth of trading and hence the ability to make large trades in specific stocks
without provoking a large change in the traded stock’s price. Emerging markets vary
considerably in their liquidity, creating a need for analytic tools that can provide insight into each
market’s liquidity. Several measures can be employed to this end:
Turnover ratios: percent of market
Turnover ratios are calculated as the ratio of value traded over one month to the total
market capitalization. A high turnover ratio means that a large number of the shares outstanding
were traded. Large turnover ratios should be associated with greater levels of liquidity, and thus
it can be expected that the larger, more developed markets exhibit higher turnover ratios. This is
indeed observed in Exhibit 12. This graph shows the distribution of turnover ratios for a number
of developed and emerging markets. With a few exceptions, notably Korea, Taiwan, and Turkey,
almost all of the emerging markets have turnover ratios lower than 5%, well below those found
in more developed markets. Interestingly, a turnover ratio of 5% seems to be the threshold that
separates developed markets from emerging markets. For example, while developed markets
such as the New York Stock Exchange (NYSE) trade almost 10% of their market value during a
month, Mexico turns over 2% of its total market capitalization, and Peru trades less than 1% in a
similar period of time.
Dollar value of shares traded
It is also useful to examine the turnover ratio in dollar terms, as this metric gives some
indication of relative volume of money moving in and out of a market during a trading day.
Exhibit 13 compares the average daily U.S. dollar value of shares traded during 2002 in
developed and emerging markets. Note that the average daily dollar value of shares traded on the
NYSE was over $10 trillion and the average daily value traded on the Tokyo exchange was $1.6
trillion. In contrast, Mexico traded a daily total of $32 billion in shares and Indonesia a total of
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$13 billion. Considering the magnitude of transactions that typical large institutional investors
conduct each day, the levels of trading in Mexico and Indonesia are low. As a means of
emphasizing this point, consider that a standard trade for an investor may be 10,000 shares at $40
per share for a trade value of $400,000. On the NYSE the $10 trillion of total trading represents
over 25 million trades of $400,000 each day. In contrast, the Indonesian market’s average daily
rate of $13 billion represents only 32,500 of these $400,000 trades per day. With the exception of
Taiwan and South Korea, the trading volumes of most emerging markets pale in comparison to
those of developed markets.
Adding It All Up
Emerging markets vary greatly in size, availability of information, and governance. As a

group these countries tend to rank just below developed markets along these dimensions, with
considerable variation in evidence between individual emerging markets. That variation begs the
question, “Which markets within the emerging markets group most closely resemble developed
nations?” Comparing the emerging markets to Greece, a nation that has recently graduated from
the “emerging” to the “developed” classification, provides a useful method for answering that
question.
In Exhibit 14, a score of 1.0 was awarded for each dimension in which the sample
country ranks higher (closer to the developed nations) than Greece. The sum of these scores
offers guidance on which nations more closely resemble Greece (and hence the developed
markets): Taiwan, South Korea, Brazil, and South Africa. What’s the difference between this
group of nations and the rest? The availability of information is the biggest factor. Markets that
are larger, more liquid, more transparent, and suffer from less corruption tend to have better
information flows, all of which translate into greater market efficiency.
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Appendix I
A Refresher on Market Efficiency
Economists describe three levels of market efficiency: the weak, semi-strong, and strong
forms of market efficiency.
Weak-form market efficiency. In a market exhibiting weak-form market efficiency,

asset prices fully reflect past information. Past prices tell us nothing about future prices. More
specifically, weak-form market efficiency rules out trends. Markets where investors have very
short time horizons would be the ones most susceptible to violations of weak-form market
efficiency.
Semi-strong-form market efficiency. In a market exhibiting semi-strong-form market

efficiency, all available public information is fully reflected in current asset prices. This implies
that there is no public information that can be used to earn abnormally high returns. It also
implies that asset prices instantaneously adjust to incorporate new public information. However,
this form of market efficiency does not rule out the possibility of using private information to
earn abnormally high returns.
Strong-form market efficiency. In a market exhibiting strong-form market efficiency,

asset prices fully incorporate all available information, both public and private. This implies that
investors could not earn abnormally high returns even with inside information.
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Appendix II
Estimating the Total Risk Attributed to the Overall Market Movements
Determining the risk of a particular stock attributed to the overall market movements is
relevant to make an assumption on the amount of firm-specific information in that market. This
appendix describes the mechanism used to measure such risk.
Borrowing from the CAPM framework, the return on a particular stock can be written as
follows:
Ri ,t  R f   i  Rm,t  R f   ei ,t
,
where Ri,t is the return on a stock for time t, Rf is the risk-free rate of return, i is the Beta of
stock i, Rm,t is the return on the market portfolio for time t, and i,t is the error term that captures
the impact of firm-specific information. Estimating the total variance of Ri,t, yields,
 2 Ri    i 2   2 Rm    2 ei  .
In this formulation the total variability of a stock can be broken down into two parts, the
market portion,  i   Rm , and a firm-specific portion,  ei  . In the estimate,
2 2
  2
 i2   2  R m 
 
 2 R i 
 is the portion of total risk attributed to the overall market movements and 1    is the
proportion of total risk attributed to impact of firm-specific information. Therefore  can be
used as a proxy for firm-specific information. Low values of  for firms in a particular market
should infer more firm-specific information.
In order to estimate  for a set of emerging markets, monthly data on returns from the
emerging market database was used for individual firms, from January 1995 through December
2002. Next, an equally weighted market return for each market, using all of the firms available in
a particular market, is calculated. Using the calculated market return for each market, an OLS
regression is run for each firm. The time series return on a particular stock was regressed against
the relevant market return. Finally, the average r-squared of the regressions is calculated for each
market. In this context, the r-squared is  . Exhibit 8 reports the market monthly standard
deviation of return for each market and the mean  , the proportion of an individual firm’s total
risk attributable to movements of the market in its home market. The exhibit also reports the
same statistics for a sample of stocks listed on the New York Stock Exchange (NYSE) for the
same period.
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Exhibit 1
Economic Characteristics of S&P/IFC Emerging Market Countries
MSCI Market Cap

S&P/IFC EMF 1998 Millions GDP 1999 Market GNP per
Country Index Index US$ Millions US$ Cap/GDP capita
Argentina X X 45,332 283,166 0.16 7,550
Bahrain X 6,770 6,600 1.03 7,640
Brazil X X 160,887 751,505 0.21 4,350
Chile X X 51,866 67,469 0.77 4,630
China X X 231,322 989,465 0.23 780
Colombia X X 13,357 86,605 0.15 2,170
Czech Republic X X 12,045 53,111 0.23 5,020
Egypt, Arab Rep. X X 24,381 89,148 0.27 1,380
Hungary X X 14,028 48,436 0.29 4,640
India X X 105,188 447,292 0.24 440
Indonesia X X 22,104 142,511 0.16 600
Israel X X 39,628 100,840 0.39 16,310
Jordan X X 5,838 8,073 0.72 1,630
Korea, Rep. X X 114,593 406,940 0.28 8,490
Malaysia X X 98,557 79,039 1.25 3,390
Mexico X X 91,746 483,737 0.19 4,440
Morocco X 15,676 34,998 0.45 1,190
Nigeria X 2,887 35,045 0.08 260
Oman X 4,392 19,600 0.22 4,940
Pakistan X X 5,418 58,154 0.09 470
Peru X X 11,645 51,933 0.22 2,130
Philippines X X 35,314 76,559 0.46 1,050
Poland X X 20,461 155,166 0.13 4,070
Russian Federation X X 20,958 401,442 0.05 2,250
Saudi Arabia X 42,563 139,383 0.31 6,900
Slovak Republic X 965 19,712 0.05 3,770
South Africa X X 170,252 131,127 1.30 3,170
Sri Lanka X 1,705 15,958 0.11 820
Thailand X X 34,903 124,369 0.28 2,010
Turkey X X 33,646 185,691 0.18 2,900
Venezuela, RB X X 7,587 102,222 0.07 3,680
Zimbabwe X X 1,310 5,608 0.23 530
Average 175,028 0.34 3,550
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Exhibit 2
Economic Characteristics of Developed Market Countries
Market Cap 1998 GDP 1999 Market GNP per

Country
Millions US$ Millions US$ Cap/GDP capita
New Zealand 89,373 54,651 1.64 13,990
Singapore 94,469 84,945 1.11 24,150
Ireland 29,956 93,410 0.32 21,470
Portugal 62,954 113,716 0.55 11,030
Greece 79,992 125,088 0.64 12,110
Finland 154,518 129,661 1.19 24,730
Norway 56,285 152,943 0.37 33,470
Denmark 98,881 174,280 0.57 32,050
Austria 34,106 208,173 0.16 25,430
Sweden 278,707 238,682 1.17 26,750
Belgium 245,657 248,404 0.99 24,650
Switzerland 689,199 258,550 2.67 38,380
Netherlands 603,182 393,692 1.53 25,140
Australia 874,283 404,033 2.16 20,950
Spain 402,180 595,927 0.67 14,800
Canada 543,394 634,898 0.86 20,140
Italy 569,731 1,170,970 0.49 20,170
France 991,484 1,432,320 0.69 24,170
United
Kingdom 2,374,273 1,441,790 1.65 23,590
Germany 1,093,962 2,111,940 0.52 25,620
Japan 2,495,757 4,346,920 0.57 32,030
United States 13,451,352 9,152,100 1.47 31,910
Average 1.00 23,942
2019.
-15- UV2527
Exhibit 3
GNP per Capita and Market Cap/GDP for Emerging versus Frontier Markets, 1999
Source: Robert F. Bruner, Robert Conroy, Wei Li, Elizabeth F. O’Halloran, and Miguel Palacios Lleras, Investing In
Emerging Markets, (Charlottesville, Virginia: The Research Foundation of AIMR, 2003).
2019.
-16- UV2527
Exhibit 4
Number of Publicly Listed Companies in Emerging and Developed Markets, July 2001
2019.
-17- UV2527
Exhibit 5
Average Company Market Capitalization, July 2001
2019.
-18- UV2527
Exhibit 6
Country Summary of Market Openness to Foreign Investments
Argentina The market is considered 100% open. Some corporate limitations apply.
Closed to foreign investment until 1999 for non-Gulf Cooperation Counsel members
(GCC members could own up to 49%); subsequently non GCC members allowed to
Bahrain
own up to 49% of domestic firms (while GCC members could own 100%). Non-
GCC nationals will be able to own 100% by the end of 2005.
The market is considered generally open. Since May 1991 foreign institutions may
own up to 49% of voting common stock and 100% of nonvoting participating
Brazil
preferred stock. Some corporate limitations apply (e.g., Petrobras common stock is
off-limits), and the voting class (ON) of banks is not available.
Chile The market is considered 100% open.
Foreign institutions may purchase B-class shares listed on Chinese stock exchanges,
China H-class shares listed on the Hong Kong Stock Exchange, and other classes of shares
offered and listed in the U.S. and U.K. without restriction.
Columbia The market is considered generally open from February 1, 1991.
Czech Republic The market is generally considered 100% open, except for banks.
There are neither restrictions precluding foreign participation in the market nor any
Egypt rules against repatriation of profits. There are a few exceptions to this rule, where
certain companies' charters do not permit foreign shareholders.
Greece The market is considered 100% open.
Hungary The market is considered 100% open.
The market is considered open from November 1, 1992. Foreign Investment
Institutions (FIIs) for investment in primary and secondary markets can register.
India
Investments are subject to a ceiling of 24% of a company’s issued share capital for
the aggregate holdings of all FIIs and to 5% for the holding of any single FII.
Since 1989 foreigners are allowed up to 49% of all companies except banks. The
Indonesia Bank Act of 1992 allowed foreigners to invest in up to 49% of the listed shares in
three categories of banks—private national, state-owned, and foreign joint venture.
Israel In general, 100% open to foreign investment.
Jordan The market is considered generally open up to 49% of listed companies’ capital.
The Korean authorities have committed to gradually opening their stock and capital
markets to foreign investors since it was first opened to foreign investment on
January 1, 1992. At that time, regulations took effect allowing authorized foreign
investors to acquire up to 10% of the capital of listed companies. Since then, the
general foreign limit has been increased several times, to 12% in January 1995, 15%
in July 1995, 18% in April 1996, and most recently to 20% on October 1, 1996. In
Korea
addition to the general limits, some lower corporate limits apply (e.g., foreign
holdings of POSCO and KEPCO are limited to 15% under the most recent rules),
while under regulations from July 1992, companies with existing foreign
shareholdings could apply to the Korea Securities and Exchange Commission to
increase the limit to 25%. The ceiling in such cases would automatically decline if
foreign-held shares were sold to domestic Investors.
2019.
-19- UV2527
Exhibit 6 (continued)
With the exception of bank and finance company stocks, most stocks are generally
Malaysia
100% available to foreign investors.
It is considered to be generally 100% open, except for banks and other financial
Mexico institutions or groups, where foreign ownership is limited to 30% of total capital
(though certain classes may be freely available to foreign investors).
While the Nigerian stock market is technically open to foreign portfolio investment,
Nigeria
the secondary market is virtually nonexistent.
Oman Closed Market.
Pakistan The market is considered 100% open from February 22, 1991.
Peru The market is generally considered 100% open.
National law requires that Philippine nationals own a minimum of 60% of the shares
issued by domestic firms. To ensure compliance, Philippines companies typically
Philippines issue two classes of stock—A-shares, which may only be held by Philippine
nationals, and B-shares, which both foreign and Philippine investors may buy.
Media, retail trade, and rural banking companies are closed to foreign investors.
Poland The market is considered 100% open.
Russia In general 100% open to foreign investment. Banks need central bank approval.
Saudi Arabia Closed to foreign investment.
Slovakia In general 100% open to foreign investment. Banks need central bank approval.
The market is generally considered 100% open, although some corporate limitations
South Africa
may apply regarding shares issued in privatizations.
The market is considered 100% open, except for banks, which are 49% open. Some
Sri Lanka
companies limit foreign investment.
Authorities permit foreign institutions meeting fairly strict registration requirements
Taiwan to invest in listed stocks, up to a 30% limit of aggregate foreign investment in a
company’s issued capital
Thai laws restrict foreign shareholdings in Thai companies engaged in certain areas
of business. The Banking Law restricts foreign ownership in banks to 25%. The
Alien Business Law, administered by the Ministry of Commerce, restricts foreign
Thailand
ownership of stocks in specified sectors to 49% as well. In addition, other laws
provide for similar restrictions. Company by-laws impose restrictions that range from
15% to 65%.
Turkey The market is considered 100% open from August 1989.
Venezuela Stocks are generally considered 100% open.
The Zimbabwe Stock Exchange was effectively closed to foreign investment by
virtue of severe exchange controls until new regulations were introduced in June
Zimbabwe 1993. The new regulations on foreign investment permitted foreigners to purchase up
to 25% of the shares outstanding of listed companies. The limit was raised to 35% by
the Reserve Bank of Zimbabwe on January 1, 1996, and then again to 40%.
2019.
-20- UV2527
Exhibit 7
Terms of Longest-Maturity Fixed-Rate Bonds Issued in Local Currency, January 1, 2001,
through March 31, 2003
2019.
-21- UV2527
Exhibit 8
Proportion of Total Variance Explained by Market Returns
Monthly Average % of Variance

Country Standard Deviation of Return Explained by the Market
Egypt 0.10 0.28
South Africa 0.07 0.28
Slovakia 0.08 0.30
Mexico 0.08 0.31
India 0.08 0.33
Brazil 0.10 0.35
Peru 0.06 0.35
Chile 0.06 0.36
Jordan 0.04 0.36
Indonesia 0.13 0.38
Czech Republic 0.07 0.40
Poland 0.09 0.41
South Korea 0.13 0.41
Argentina 0.11 0.43
China 0.06 0.43
Thailand 0.13 0.43
Colombia 0.07 0.45
Philippines 0.08 0.45
Israel 0.07 0.46
Taiwan 0.09 0.47
Zimbabwe 0.11 0.47
Hungary 0.10 0.50
Turkey 0.16 0.50
Venezuela 0.10 0.52
Malaysia 0.10 0.58
Morocco 0.04 0.58
Pakistan 0.10 0.60
Russia 0.17 0.60
Sri Lanka 0.08 0.74
Average 0.09 0.44
United States 0.04 0.16
Correlation of standard deviation
and market portion of total variance 24.88%
2019.
-22- UV2527
Exhibit 9
PricewaterhouseCoopers Opacity Index
Country Corruption Legal Economics Accounting Regulatory O-Factor

Singapore 13 32 42 38 23 29
Chile 30 32 52 28 36 36
USA 25 37 42 25 48 36
UK 15 40 53 45 38 38
Hong Kong 25 55 49 53 42 45
Italy 28 57 73 26 56 48
Mexico 42 58 57 29 52 48
Hungary 37 48 53 65 47 50
Israel 18 61 70 62 51 53
Uruguay 44 56 61 56 49 53
Greece 49 51 76 49 62 57
Egypt 33 52 73 68 64 58
Lithuania 46 50 71 59 66 58
Peru 46 58 65 61 57 58
Colombia 48 66 77 55 55 60
Japan 22 72 72 81 53 60
South Africa 45 53 68 82 50 60
Argentina 56 63 68 49 67 61
Brazil 53 59 68 63 62 61
Taiwan 45 70 71 56 61 61
Pakistan 48 66 81 62 54 62
Venezuela 53 68 80 50 67 63
India 55 68 59 79 58 64
Poland 56 61 77 55 72 64
Guatemala 59 49 80 71 66 65
Thailand 55 65 70 78 66 67
Ecuador 60 72 78 68 62 68
Kenya 60 72 78 72 63 69
Czech Republic 57 97 62 77 62 71
Romania 61 68 77 78 73 71
Korea 48 79 76 90 73 73
Turkey 51 72 87 80 81 74
Indonesia 70 86 82 68 69 75
Russia 78 84 90 81 84 84
China 62 100 87 86 100 87
2019.
-23- UV2527
Exhibit 10
Test of Weak-form Efficiency in Emerging Market
Country 1-week lag 2-week lag R-square Efficiency

Argentina -0.0036 ***0.1615 0.020 N
Bahrain
Brazil (0.0176) 0.083 0.001 Y
Chile ***0.2412 (0.0041) 0.052 N
China **0.1149 0.008 0.013 N
Colombia ***0.1896 **0.1195 0.055 N
Czech Rep. **0.1237 0.0603 0.015 N
Egypt 0.0330 (0.013) 0.005 Y
Hungary (0.0616) ***0.1840 0.034 N
India 0.0482 (0.0023) 0.004 Y
Indonesia (0.0807) 0.0781 0.007 Y
Israel (0.0246) 0.0358 0.005 Y
Jordan 0.0217 0.0166 0.005 Y
Korea (0.0083) 0.0856 0.009 Y
Malaysia 0.0264 0.0796 0.001 Y
Mexico 0.0489 (0.0005) 0.004 Y
Morocco **0.1420 0.0234 0.016 N
Nigeria ***0.1610 *0.1016 0.036 N
Pakistan ***0.1572 *0.0973 0.033 N
Peru **0.1155 0.0126 0.008 N
Philippine 0.0746 ***0.1760 0.033 N
Poland (0.0295) **0.1324 0.017 N
Russia 0.0817 (0.0208) 0.001 Y
Slovakia (0.0629) 0.0835 0.005 Y
South Africa 0.0729 0.058 0.003 Y
Sri Lanka *0.0911 0.0492 0.006 N
Taiwan (0.0216) 0.0085 0.006 Y
Thailand 0.0461 ***0.1724 0.027 N
Turkey 0.0296 **0.1099 0.007 N
Venezuela 0.0806 **0.1319 0.020 N
Zimbabwe 0.0749 0.0495 0.002 Y
United States (0.0894) 0.0082 0.002 Y
Level of statistical significance
*** 1%
** 2%
* 10%
2019.
-24- UV2527
Exhibit 11
Information and Market Efficiency Scores
Government
Favorable Fixed-Rate Evidence Market is
Trading Bonds Good Firm-Specific Weak-Form
Country Characteristics Available Information Efficient Score
South Korea 1 1 1 1 4
South Africa 1 1 1 1 4
Mexico 1 1 1 1 4
Taiwan 1 1 1 1 4
Slovakia 0 1 1 1 3
Indonesia 0 1 1 1 3
India 0 1 1 1 3
Brazil 1 0 1 1 3
Thailand 0 1 1 0 2
Poland 0 1 1 0 2
Malaysia 0 1 0 1 2
Jordan 0 0 1 1 2
Egypt 0 0 1 1 2
Czech Republic 0 1 1 0 2
China 0 1 1 0 2
Chile 0 1 1 0 2
Zimbabwe 0 0 0 1 1
Venezuela 0 0 0 1 1
Sri Lanka 0 1 0 0 1
Philippines 0 1 0 0 1
Peru 0 0 1 0 1
Israel 0 0 0 1 1
Hungary 0 1 0 0 1
Colombia 0 1 0 0 1
Argentina 0 0 1 0 1
Morocco 0 0 0 0 0
Turkey 0 0 0 0 0
Russia 0 0 0 0 0
Pakistan 0 0 0 0 0
2019.
-25- UV2527
Exhibit 12
Average Turnover Ratio for Emerging and Developed Markets, 2002
2019.
-26- UV2527
Exhibit 13
Average Daily Value of Shares Traded in Emerging and Developed Markets, 2002
2019.
-27- UV2527
Exhibit 14
Ranking Relative to Greece
(Value = 1 if rank is higher than Greece)
Size Liquidity Corruption Total

GDP Total Investable Turnover(%) Turnover ($) CPI Score
Argentina 1 1
Bahrain 0
Brazil 1 1 1 1 4
Chile 1 1
China 1 1 2
Colombia 0
Czech Republic 0
Egypt 0
Greece 1 1 1 1 1 1 6
Hungary 1 1 2
India 1 1 2
Indonesia 1 1
Israel 1 1 2
Jordan 1 1
Korea 1 1 1 1 1 5
Malaysia 1 1 2
Mexico 1 1 1 3
Morocco 0
Nigeria 0
Oman 0
Pakistan 0
Peru 0
Philippines 0
Poland 0
Russia 1 1
Saudi Arabia 1 1
Slovakia 1 1 2
South Africa 1 1 1 1 4
Sri Lanka 0
Taiwan 1 1 1 1 1 5
Thailand 1 1 2
Turkey 1 1 2
Venezuela 0
Zimbabwe 0
2019.

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UV2527

Investing in Emerging Markets

CHARACTERISTICS OF EMERGING MARKETS

Today, roughly 30 countries are considered to be in transition to higher levels of

1. It is in a low- or middle-income country, as defined by the World Bank, and

In contrast, S&P/IFC defines3 a market as “developed” if it is in a country where gross

Market Size and Openness

In general, the Global Index of a market is created to be representative of that market. As

 A stock must have a minimum investable market capitalization of US$50 million.

Broad market information in emerging markets

Exhibit 7 shows the longest maturity, fixed-rate, local currency-denominated bond

Firm-specific information in emerging markets

In addition to determining the amount of broad market information available in a given

Opacity Index. PricewaterhouseCoopers has constructed an index to measure

Corruption Perception Index (CPI). Transparency International provides an annual index

Testing market efficiency in emerging markets

Exhibit 11 combines the findings on trading characteristics, the existence of fixed-rate

Turnover ratios: percent of market

Dollar value of shares traded

Emerging markets vary greatly in size, availability of information, and governance. As a

Weak-form market efficiency. In a market exhibiting weak-form market efficiency,

Semi-strong-form market efficiency. In a market exhibiting semi-strong-form market

Strong-form market efficiency. In a market exhibiting strong-form market efficiency,

 2 Ri    i 2   2 Rm    2 ei  .

MSCI Market Cap

Market Cap 1998 GDP 1999 Market GNP per

Monthly Average % of Variance

Country Corruption Legal Economics Accounting Regulatory O-Factor

Country 1-week lag 2-week lag R-square Efficiency

Size Liquidity Corruption Total

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