Sector and Factor Evolution in Emerging Markets

Shuo Xu

Sector composition of the MSCI Emerging Markets Index went through meaningful changes during the last two decades, most recently with the rise and reclassification of sectors related to the digital economy. Such trends were also reflected in the relative positioning of countries and factors. For example, South Korea maintained a leading position in the consumer-discretionary sector for years until South Africa recently caught up. In addition, the consumer-discretionary sector went through significant shifts in factor exposures: With the sector reclassification in September 2018, that sector saw reversion to the growth factor (from negative to positive active exposure), as well as a significant drop in active exposure to the value and yield factors between 2018 and 2019.

MSCI FaCS provides a framework to measure portfolio exposure to eight factor groups (i.e., value, size, momentum, volatility, quality, yield, growth and liquidity). All the weights and active exposures are calculated as of the end of June in each year. Active FaCS exposures are calculated as the sector FaCS exposures over the MSCI EM FaCS exposures at the time point.