MSCI (formerly Morgan Stanley Capital International but divested in 2007 and now independent) and S&P are the leading equity indices and they have become very critical to market weightings for global equities and the intellectual capital and property of both are much deeper and more complex that most realize given the increase in ETFs (exchange traded funds), passive investing and market allocation based on their views of market capitalization, market type or classification and criteria for their weighting and classification.
Here from MSCI’s own site, is their equity market classification: “Per the MSCI Market Classification Framework, global equity markets are divided into four primary categories:
Developed markets: Highly industrialized economies with mature, large and highly accessible financial systems (e.g., US, Japan, UK).
Emerging markets: Economies experiencing rapid industrialization and growth with relatively established but still developing financial market infrastructures and accessibility (e.g., China, India, Brazil).
Frontier markets: Smaller, less liquid economies that are investable but have significant accessibility or development constraints compared to emerging markets (e.g., Vietnam, Morocco, Kazakhstan).
Standalone markets: Countries that do not meet the minimum criteria for the other three categories due to extreme size, liquidity, or severe market accessibility issues, but are still individually (e.g., Argentina, Jamaica, Lebanon).
Additionally, MSCI features a subcategory within the frontier universe known as advanced frontier markets, which identifies markets whose operational accessibility closely aligns with developed markets but which remain categorized as frontier due to size and liquidity constraints. These classifications are evaluated annually using the MSCI Market Classification Framework, which assesses countries based on three core criteria: economic development, market size and liquidity, and market accessibility (such as foreign ownership limits, capital flows and operational efficiency).
Depending on your classification, and market size and breadth, funds are allocated to eligible equities listed or in the case of ETFs, funds are created to passively mimic the components and weighting of these indices. For example, the MSCI EM Asia Pacific Index, which excludes Japan but includes China (25 percent), South Korea (27.6 percent), and so on, the Philippines weight is 0.5 percent. That is the percentage that fund will probably place in Philippine stocks if actively managed and absolutely limit to that and the underlying stocks that are in the index if passively managed like an ETF. Now you know why I say we are a rounding error among foreign investors, even when limiting ourselves to Asia only investors and excluding Japan which is considered a developed market. We are literally less than 1 percent.
For Asia, developed markets are Australia, Hong Kong, Japan, New Zealand, Singapore. Emerging markets are China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand. Frontier markets are Bangladesh, Kazakhstan, Pakistan, Sri Lanka and Vietnam.
This is a big deal as in the US, for mutual funds and ETFs are estimated based on how you define the terms are passive funds or investing is between 50-65 percent. This trend is less advanced but moving in that direction elsewhere. What this means is there no stock pickers or analysts as in actively managed funds, just a replica of the weighting for the stocks and percentages of the relevant index — MSCI Asia Pacific, S&P 500, Nasdaq 100, Kospi Index, and so on. Very few funds are limited to the MSCI Philippine Index or the PSE Indices, but they are important in how to allocate what small percentage of Philippine stocks are in these funds whether active or passive.
Now because of the success of Vietnam and governance issues in Indonesia both corporate and government, what is happening with both? To quote Vietnam Briefing and Reuters: “Vietnam is officially upgrading from Frontier to Secondary Emerging Market status in the FTSE Russell indices, with the transition taking effect on Sept. 21, 2026. The reclassification will be implemented in four phases extending through September 2027 and is projected to unlock up to $6 billion in foreign capital inflows.”
Hence the steady performance of the Vietnam Stock Exchange even during this crisis. Year to date, Vietnam’s Stock Index is up about 5.22 percent in spite of Iran and 39.46 percent for 52 weeks. Year to date, the Philippine composite index is down over 1 percent year to date and over 52 weeks. Vietnam’s shift to emerging by the FTSE should provide at least a floor, and if the others like MSCI and S&P follow, the amounts to be allocated based on the increased market weighting should provide more upside. All data for index performance is from Bloomberg.
At the same time, the issues in Indonesia have not just led to their year-to-date performance of the IDX being down 31.95 percent and for 52 weeks down 10.58 percent, but as many like Bloomberg and Reuters have reported they are on the watch list for a downgrade from emerging to frontier if they don’t address these issues on corporate governance, liquidity and policy. The worst may still be ahead for them if the downgrade happens.
South Korea has been the darling for what is usually the opposite reason. Lack of diversity in the index! Two-thirds of the index is weighted toward just Samsung Electronics and SK Hynix which are winners together with TSMC (Taiwan Semiconductor) in supplying cutting edge chips required for AI. The Kospi is up around 101 percent year to date and 171 percent over 52 weeks yet was only trading at half comparable multiple of equivalent US stocks and below TSMC. Then South Korean President Lee appointed former tech CEO Han Seong-sook as prime minister to help ensure the country realizes its potential growth from AI. Compare that to what is going on in our Senate.
Lessons for us. As I have previously written and said, what is the solution for our stock market woes? First, part of the reason is the imbalanced economy we have. Second, stop trying to attract portfolio international investors. We are a rounding error. Changing that is necessary but will take decades. Develop our local investor pool to be equivalent to other Asian markets where majority of the investors are internal. As the Buddhists say “change comes from within.”
The author is an independent director of the state-run Maharlika Investment Corp.
