Mapped: The World’s Fastest Growing eCommerce Markets
Bringing the World Into Focus: A Guide to MSCI Indexes
Economic development around the world has led investors to consider broadening their investment exposures.
But with nearly 30,000 equity securities available globally, the universe is far too large for an investor to filter by themselves.
In this sponsored infographic from MSCI, we explain their index creation process that allows them to map and categorize the stock market.
Defining the Global Universe
Although a majority of global market capitalization is located in the U.S., overseas markets (both developed and emerging) are home to thousands of publicly-listed companies.
Thus, the first step that MSCI takes is identifying eligible securities from public stock markets. Mutual funds, ETFs, and equity derivatives are screened out. This leaves ordinary and preferred shares, share equivalents, and real estate investment trusts (REITs).
Share equivalents are securities that can be converted into company shares. This includes securities such as American depository receipts (ADRs), which are certificates issued by U.S. banks that represent a specified number of a foreign company’s shares. Meanwhile, REITs are companies that own and operate income-producing real estate such as office buildings.
Applying Investability Screens
A stock index is not useful if its underlying securities are not widely accessible.
To create an investable representation of the global market, MSCI screens its universe of eligible securities according to three requirements.
1. Shares must be investable
MSCI analyzes two different size metrics—free-float market cap and full market cap—to make an assessment of the share capital available for investors.
Free-float market cap refers the value of shares readily available in public markets, while full market cap is equal to the former, plus the value of shares provided through a company’s equity issuance plans. For a company to be included in an MSCI index, it must meet the minimum target for both of these metrics.
2. Shares must be accessible to international investors
To ensure that investors from all regions can access its indexes, MSCI sets a minimum threshold for a security’s foreign inclusion factor (FIF).
The FIF of a security is the proportion of shares outstanding that is publicly available for purchase by international investors.
3. Shares must be sufficiently tradeable
The underlying securities of an index must have sufficient liquidity so that the index can be used as a benchmark for ETFs and other products.
MSCI uses two metrics to determine how liquid a stock is, with the first being 3 month frequency of trading (FOT). This metric compares the number of days a stock traded during a 3 month period, with the maximum number of trading days in that period.
The second metric is the annual traded value ratio (ATVR), which measures the percentage of total share value that is traded every year. This enables MSCI to identify stocks with stable long- and short-term liquidity.
Classifying Companies
At this stage, MSCI has an investable representation of the global market.
The next step is to classify every company into three non-overlapping categories, enabling MSCI to create indexes that target specific countries, regions, or sectors. Indexes can also focus on larger or smaller companies.
| Category | Detail |
|---|---|
| Country | A company and its securities can only be classified in one country. MSCI considers criteria such as:
|
| Sector | Using the Global Industry Classification Standard (GICS), a company is assigned to the sector that best describes its business activities. GICS consists of:
|
| Size | A company can only be assigned to one size segment. These are:
|
Over 50 Years of Index Development
The world’s equity universe is constantly changing, opening up new opportunities within industries, countries, and even entire regions.
While some investors aim to support the fight against climate change, others look to take advantage of long-term structural trends. Regardless of the objective, investors need a starting point from which they can build a relevant portfolio.
MSCI indexes seek to provide extensive coverage of the world’s opportunities, giving investors the tools they need to shape and refine their investment allocations.
Investing in the Chip-Tech World
How much of the modern world is powered by chip-tech? From computers and TVs to cars and washing machines, chips (or semiconductor devices) enable almost all of our digital goods.
When the COVID-19 pandemic brought the regular world to a halt, it put a focus on our increasingly digital world and personal electronics. Even as consumption of major purchases like vehicles slowed down, more than 1 trillion chips were shipped globally in 2020.
As economies picked up and demand increased across all goods, a global semiconductor shortage started to impact the largest companies and economies in the world. All of a sudden, the global semiconductor field was front-and-center in the minds of politicians, executives, and investors.
This graphic from eToro breaks down the importance of the semiconductor industry, and where moves are being made in it.
Understanding the Semiconductor Supply Chain
At its core, a chip or integrated circuit (IC) is a small device that contains electronic circuits on a semiconducting material.
Only a few millimeters wide, these chips (usually constructed on silicon) have millions of transistors packed into a tiny device. When designed and utilized together, they power devices and allow them to operate.
It’s a complex device that requires an extremely robust manufacturing system, capable of making millions of precisely designed products. The modern semiconductor supply chain has two primary business models:
As demand for semiconductor devices grew, a massive and sophisticated global supply chain formed to get chips from concept to consumer.
| Market Share by Region | IDM | Fabless | Foundry | Wafer Production |
|---|---|---|---|---|
| U.S. | 51% | 65% | 0% | 13% (North America) |
| South Korea | 29% | 1% | 18% | 20% |
| Taiwan | 2% | 17% | 63% | 21% |
| Japan | 9% | <1% | 0% | 16% |
| China | <1% | 15% | 6% | 15% |
| Europe | 9% | 2% | 0% | 6% |
| Rest of World | 0% | 0% | 13% | 9% |
Many of the pioneering companies in the field, like Taiwan’s TSMC and South Korea’s Samsung, became some of the world’s largest and most influential companies.
Anticipating the Chip-Tech Powered Future
The global economic impact of the semiconductor field is monumental, and its breadth is quickly becoming better understood.
In the U.S. alone in 2020, the semiconductor industry contributed an estimated $246.4 billion to the country’s GDP and almost 2 million jobs. When measuring direct, indirect, and value-added impacts of semiconductors, global GDP contribution estimates come in at $2.7 trillion.
But more than ever, recent disruptions to the supply chain have raised alarm bells and increased investment. Slashed forecasts from automakers and electronics manufacturers are increasing demand for chip production capacity, and chipmakers have already announced investments for new factories in 2021:
| Company | Announced Fab Investment (2021) | Fab Location |
|---|---|---|
| TSMC | $12B–$35B | U.S. (Arizona) |
| Intel | $20B | U.S. (Arizona x2) |
| Intel | $20B | Europe |
| Samsung | $17B | U.S. (Texas) |
| GlobalFoundries | $4B | Singapore |
And those six factories are just the beginning. Over the next two years, 29 fabrication factories are projected to be constructed globally, with total investment surpassing $140 billion.
Policymakers are stepping in as well, as countries race to increase market share in case of further disruptions. In June, the U.S. Senate passed a $250 billion tech and manufacturing bill with $52 billion earmarked for the semiconductor field specifically.
The timing is imperative, as an even more chip-dependent future continues to unfold. Driven by advances in 5G, A.I. and IoT in everything from automotive and electronics manufacturing to smart factories, chip-tech and investments in it are becoming more important than ever.
This content was originally published here.