Brazil, China Gain Clout in MSCI Emerging Markets Index

The growing influence of Brazil and China in the world economy received further recognition this week when the most commonly used benchmark for emerging-market stocks increased the weighting of companies in those nations.

MSCI Inc’s MSCI Global Standard Indices said in its latest semiannual review this week that it will add 11 Brazilian companies to its MSCI Emerging Markets index at the end of the month, making Brazil the top gainer in the 22-country list. China was the second-highest gainer, with MSCI adding seven securities issued by companies in China and deleting one.

“A move like this further confirms our view of the importance of investing in small- and mid-cap names in emerging markets for investors. This increase in weighting also provides evidence that the extraordinary amount of [initial public offerings] to come out of Brazil over the past three years have, for the most part, been well received by investors,” said Ed Kuczma, an equity analyst at Van Eck Global in New York.

Brazil and China have been gaining a steady share of this marketplace segment, and MSCI is simply echoing the sentiment of many investors. “Our standard indices are just passive reflections of the market,” said Dimitris Melas, executive director in research for MSCI Barra in London.

“If China and Brazil continue to lead this [recent stock] rally, then you might see their weight and the number of companies increasing further,” he said.

Brazil has rallied the most on the MSCI year to date, up 121% as of Thursday in dollar terms, according to MSCI. China is further down on the list, but has advanced 62% so far this year in dollar terms, MSCI said.

“It’s [MSCI] acknowledging the secular attractiveness of those two markets,” said Uri Landesman, head of global growth are ING Investment Management Americas in New York.

“Quantitatively, they are the bigger piece in the pie right now and qualitatively, they have the most legs,” he said.

The additions are not that surprising for those following the latest developments in the global economy. But, they do reflect the trends that have been in place for the past few years.

“The places creating the largest amount of wealth are going to have more companies going in. That’s what a capitalized index does,” said Nicholas Smithie, manager of the Emerging Markets Equity Fund at MFS Investment Management in Boston. His fund is pegged to the MSCI and is most heavily invested in Brazil and China.

Chinese companies added to the list include Anta Sports Products Ltd., BBMG Corp., Golden Eagle Retail Group, Greentown China Holdings, Poly (Hong Kong) Investment Ltd. and Xinao Gas Holdings Ltd. Guangshen Railway was taken off the list.

Out of Brazil, additions include BR Malls Participacoes SA, Gafisa SA, Gol Linhas Aereas Inteligentes SA, Hypermarcas SA, LLX Logistica SA, Localiza Rent a Car SA, Lojas Renner, Multiplan Empreendimentos Imobiliarios SA, PDG Realty, Rossi Residencial SA, and Tam SA .