Indexes have both tracked and evolved with Asian economies. The MSCI Emerging Markets Asia Index, for instance, has long been treated as a barometer of the fortunes of emerging economies in Asia.
Now indexes have become an increasingly important, complex and diverse aspect of the investment ecosystem in the region.
The growing variety of benchmarks covering Asia Pacific reflect the diversity of the region. Sebastien Lieblich, head of Europe, Middle East and Africa and Asia Pacific at MSCI, says it’s worth resisting the temptation to treat the region as a single entity. Asia exhibits “a spectrum of developments across markets and sub-regions, each at a different stage of sophistication”.
Ji Zhuang, head of indices, Asia Pacific at Bloomberg, notes that while Asia’s indexing environment is increasingly mature, “maturity varies sharply by market/country, asset class, investor segment and product wrapper”.
According to Lieblich, institutional investors across the region are engaging with index-based strategies in meaningful ways. He points to the elements of the established ecosystems around index products — asset managers are able to manage against benchmarks, availability of futures and options, bank adoption for over-the-counter positions, and liquidity provision.
Zhuang says index usage is deeply embedded in the investment ecosystem of markets like Japan, Australia, Hong Kong, Singapore, Korea and Taiwan. They serve as the foundation for exchange-traded funds, institutional benchmarks, derivatives, structured products and asset allocation models.
But adoption in other markets is moving at different speeds, often due to constraints around access, liquidity, regulation, tax, foreign ownership, distribution and data availability. This indicates some of the abiding challenges for the region.
Indexes are often graded on efficiency, concentration and stability. Historically, Asia’s indexes have been rated as inefficient due to high concentration in particular stocks. This is perhaps inevitable in any subregional market. In any event, these issues receive considerable attention from index providers.
“What is also notable is the breadth of use cases,” says Lieblich. These include institutional investors deploying capital through ETFs, segregated mandates, derivatives, and public and private funds, and increasingly using the transparent, rules-based nature of indexes for corporate engagement. “That evolution reflects a more sophisticated understanding of what indexes can do.”
Opportunities and challenges
Growth in index usage in the Asia Pacific region has evolved in a relatively conservative way. Zhuang expects the regional market to continue for now to direct most flows towards broad market-cap and “Top X” products — the simplest, most liquid and most familiar basics. However, “we are seeing rising demand for more targeted exposures that help investors express specific views or objectives”.
He lists themes that are accessible via ETFs, such as income, duration, downside management or multi-asset allocation. These, in his experience, create opportunities for index providers that can translate such needs into transparent, rules-based and investable benchmarks.
Lieblich identifies climate-themed indexing as the area of greatest momentum in regional benchmarks. “Over the past 18 to 24 months, we have seen a significant ramp-up in assets from across Asia Pacific — from Australia, Singapore, Taiwan, Greater China, and increasingly Japan”.
Asset owners are moving from using climate indexes as secondary reference tools to primary benchmarks that formally integrate sustainability considerations into investment mandates. “That is a meaningful shift in both intent and capital deployment,” Lieblich says.
But challenges and complications remain.
Divergence between currencies is one factor that influences Asian indexes far more than efficiency, concentration and stability. In China, the distinction between the onshore and offshore currency is one that impacts Asian indexes.
Heavy participation of many retail investors may also affect the behaviour of an index.
“Accessibility and transparency remain central issues in parts of the region,” Lieblich says. “Institutional investors globally have clear expectations around free float quality and market framework consistency. Where those standards are not consistently met, it creates friction for both index inclusion and broader investor confidence.”
Index buildout
Zhuang characterises indexing in Asia Pacific as having a hybrid ecosystem.
“Global index providers are influential in international/cross-border, institutional and multi-market exposures,” he says. Meanwhile, “local providers remain strongly entrenched in domestic benchmarks, flagship indices, exchange/pricing agency ecosystems and retail-facing products”.
Lieblich sees this relationship as more complementary than adversarial. “Global index providers tend to anchor the benchmarks used by international institutional investors,” he says. Widely adopted standard methodologies create network effects and make capital deployment significantly more efficient. “An investor choosing a more locally specific benchmark does not benefit from that ecosystem in the same way.”
Global index providers have strong penetration where investors need internationally recognised, rules-based and comparable benchmarks. Their key advantages are global brand recognition, methodology governance, broad market coverage, multi-asset infrastructure and acceptance by international asset owners and ETF issuers.
Zhuang sees global index providers leading in global asset allocation, regional equity exposure, emerging-market mandates, global fixed income, environmental, social and governance or climate indexes, factor strategies, thematic baskets and internationally listed ETFs.
“At the same time, there will always be investors with specific needs — their own responsible investment policies, particular exclusions, tracking error constraints relative to a local market benchmark,” Lieblich says. “For those investors, region-sensitive or customised indexes serve an important purpose, and we see a healthy mix of both across Asia.”
Local index providers often provide the benchmarks that are the default reference points for domestic investors, ETF issuers, exchanges, derivative markets and news media.
“Local providers benefit from domestic brand recognition, exchange connectivity, regulatory familiarity, local data access and strong links with local asset managers and distributors,” Zhuang says.
The recent volatility in some Asia Pacific indexes indicates that there is still work to be done, not least in investor education.
