S&P Dow Jones Continues to Bet on Emerging Markets for Growth
CEO Alex Matturri sees growing long-term demand for Dow Jones’s products in developing countries, notwithstanding recent market weakness.
Stocks in many emerging-markets economies have suffered over the past year as a shift in Federal Reserve policy sparked an outflow of capital, but Alex Matturri still sees plenty of opportunity in the region. Matturri, the CEO of S&P Dow Jones Indices, is eagerly expanding the firm’s array of index products in the emerging markets in anticipation of strong growth ahead.
S&P Dow Jones, a joint venture between New York–based McGraw Hill Financial and Chicago-based CME Group, is in the process of opening up a new operations center in Mumbai that will cater to the growing index-investing needs of the Indian market and provide back-office support for the firm’s global operations. The office, which currently employs 10 people and may expand to 40 within two years, joins New York, London and Beijing as global hubs of the company.
“China and India are both very important markets in terms of opportunities,” Matturri tells Institutional Investor during a visit to the company’s Hong Kong office. “We also see a lot of interest in Latin America. There, it is the interests of Latin Americans to invest outside their home country, looking to diversify through exchange-traded funds, but the markets are still much smaller in terms of potential than China and India.”
According to the most recent ranking by the World Bank, the market capitalization of China’s 3,000-plus listed companies exceeded $3.7 trillion in 2012, making it the world’s second-largest equity market after the U.S., which stood at $18.7 trillion. India’s market capitalization was $1.3 trillion, ranking it ninth. Although China has been in a bear market for nearly five years and Indian stocks have traded sideways for most of the past three and a half years, both markets are more than five times their size of a decade ago.
Notwithstanding short-term growth concerns in many emerging markets, S&P Dow Jones is confident in its strategy to expand in these areas, says Matturri, who before joining the firm in 2007 was a senior vice president and director of global equity index management at Northern Trust Global Investments. “We operate a global business in indexes,” he says. “If you turn the clock back 10 to 15 years, most index operators were in local markets. Most investors who used our indexes were U.S. investors. That business has grown globally.”
The firm’s dominant offering is still its flagship S&P 500 index, which has more than $5.14 trillion in assets benchmarked to it, but international markets are growing in importance. S&P Dow Jones provides data for an eye-popping 1 million indexes and subsets around the world, covering all major markets, including more than 50 emerging markets, and all major asset classes.
In Asia the firm partners with the Australian Securities Exchange, India’s Bombay Stock Exchange and the Korea Exchange to produce a range of indexes geared for both global and local investors. “We always talk to all the exchanges,” Matturri says. “Exchanges want to work with us because we have a global footprint already.” In Korea, for example, all local investors are familiar with the KOSPI index, but few outsiders know much about it, he says. “We help popularize the KOSPI index globally,” he adds.
China is another story. The company doesn’t have a partnership with the Shanghai or Shenzhen stock exchanges or with their Shanghai-based joint venture, China Securities Index Co., which provides the benchmark CSI 300 index. Instead, S&P Dow Jones Indices partners with Hang Seng Indexes Co., provider of Hong Kong’s benchmark equity index, to produce the HSI Volatility index (VHSI), which measures the expected 30-day volatility of stocks in the Hang Seng index. And last December it launched the S&P Total China BMI Indices, a family of five indexes covering mainland-listed stocks; Chinese companies listed in offshore markets; and the greater China market, including Hong Kong and Taiwanese companies.
“CSI is well known in China, but it isn’t well known outside of China,” says Matturri. “A lot of global investors feel comfortable with a brand like S&P Dow Jones because they know what the brand stands for. So when we don’t have a chance to cooperate with exchanges, we will build our indexes and try to get people to use them.”
The firm also offers the Dow Jones BRIC 50 DR index, which tracks 50 of the largest and most liquid companies in the Brazil, Russia, India and China offshore markets. The index, which was launched in 2009, declined 8.2 percent in the 12 months ended April 29.
“The first thing about emerging markets is they all have different aspects and different angles,” says David Blitzer, managing director and chairman of the S&P Dow Jones Index Committee. “Clearly, in the last six to nine months, they had a lot of difficulties. A lot of that ties back to U.S. Federal Reserve’s quantitative easing, which resulted in money being sucked out of emerging markets. The reaction in equity markets has been an overreaction.”
Blitzer says he doesn’t believe that emerging markets, particularly in Asia, suffer from the same kind of economic troubles as in the late 1990s when many of the nations endured high levels of corporate debt. “China is clearly the biggest emerging market, and its growth rate will be slowing from 10 percent to 7 percent or 8 percent,” Blitzer says. “That is the biggest change, and it will put downward pressure on various other markets that had been trading with China quite extensively.”
Paul Schulte, a Hong Kong–based analyst and chief executive officer of independent research firm Schulte Research International, agrees. “Some growth enterprise markets are at the end of their credit cycle and are dead money,” he says. “These are Brazil, China, Chile, Thailand and Turkey. Others can see robust growth, like Indonesia and Taiwan. Korea is geared into a global recovery.”
Despite the slowdown in emerging markets, Matturri says S&P Dow Jones will continue to launch more products for both developed and emerging markets as global investors look to diversify their portfolios across markets.
“The argument goes back to active versus passive investing,” he says. “Research has proved active managers find it difficult to outperform the benchmark over time. Their cost structure is also much higher than passive strategies. We see those trends across all asset classes. Because of that, we see rising demand for use of indexes.”