"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things." — Adam Smith
In the late '80s, a small group of institutional investors started to look beyond traditional equity markets to invest in emerging markets. These early investors had a very simple, yet powerful rationale for investing in these markets. They postulated that they would benefit from rapid economic growth if they invested in markets that were at an early stage of development and had considerable potential for further development. They anticipated that developing countries would progressively adopt market-oriented policies in a globalizing world and that they could invest in companies at low valuation, as these markets were under-researched and undiscovered.
Indeed, the last 20 years have seen a continuously expanding universe due to the opening of previously closed markets or markets reaching sufficient size and liquidity to become investable.
For example, since the MSCI Emerging Markets Index was introduced in 1988, the weight of emerging markets in the MSCI All Country World Index (ACWI) has grown from less than 1 percent to 12 percent, as depicted in Figure 1. This has lead to a radical change in the opportunity set available to international investors.
In the last two decades, several major geopolitical events have triggered the process of adoption of free-market reforms, resulting in the opening up of many markets. For example, the demise of the Soviet Union, the collapse of apartheid in South Africa and the adoption of more liberal economic policies in China and India have contributed to the development of freer markets.
These developments have been recognized by the inclusion of these markets in international equity indices. The timeline in Figure 2 illustrates the regular growth of the opportunity set, with countries being added to the MSCI International Equity Indices every few years. Along the way, some of these countries have become classified as developed markets (Greece and Portugal), while others have reversed course and have exited the international investment opportunity set, such as Venezuela. Other indexes may have different approaches, but this highlights how MSCI Barra saw the global investable marketplace evolving over the past 20 years.
The combination of the desire for and achievement of economic growth, and the willingness to open the investment opportunities to nonlocals to attract capital has led to more markets joining the international investment opportunity set. The latest entrants are markets from countries in the Persian Gulf, the Balkans and sub-Saharan Africa, among others. On the demand side, investors continue to seek new investment opportunities and show interest in investing in these "frontier" markets, which are typically smaller, and have fewer and smaller companies that are less liquid. This has led to the creation of the MSCI Frontier Markets Indices in 2007.