Feb 10, 2019 - Economy

When market indices get political

illustration of Greek pillars

Illustration: Aïda Amer/Axios

The most powerful actors in the financial world might well be the index providers. They essentially compel all passive investors when it comes to their asset allocation. They also create the benchmarks against which nearly all active investors are measured.

The state of play: When indices change, billions of dollars of money can end up moving as a result. When it comes to emerging markets, the two giants of the indexing world are the MSCI for stocks and the EMBI for bonds. When those indices are altered, all emerging-market fund managers, be they active or passive, will feel the consequences.

  • Index providers are susceptible to government coercion. China twisted MSCI's arm to try to persuade it to include Chinese stocks in its emerging market index. Meanwhile, Venezuelan politicians aligned with Juan Guaidó, who may or may not be the president of Venezuela depending on who you believe, want JPMorgan, which runs the EMBI index, to keep the country in the index, despite the fact that it's illegal for Americans to buy Venezuela's bonds.

The bottom line: Everything is susceptible to human biases, even supposedly objective indices. People think that the S&P 500 includes the 500 biggest stocks in America, for instance, but it doesn't: Tesla has never been included. If you can influence the people who determine what gets into the index and what doesn't, that's real power.

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