Skip to main content

You are here

Blog Listing Page

EM countries: A gap between economic and market size

A broader look at EM countries reveals that China is not anomalous – in fact, disparities between economic and market size exist for many EM countries. China’s new title as the world’s largest economy and the November launch of its groundbreaking stock connect program has made for a noteworthy growth story. But China is not the only large EM economy to have recently made progress toward growing both its equity markets and economic footprint. For example, India and Indonesia both held national elections in 2014, the results of which delivered the promise of economic reform. 

Largely as a result of these developments, China, India and Indonesia all delivered positive country performance in 2014, effectively increasing the size of their equity markets and corresponding share of market cap weighted indexes. But when considering economic size (as measured by GDP), all three of these countries are still underrepresented in global market cap weighted indexes relative to developed countries. 

The chart below illustrates how choice of yardstick to measure a country’s size can yield significantly different results. When comparing the market cap weighted FTSE All-World Index to the FTSE All-World GDP Weighted Index, the weights of these three EM countries differ materially.

Source: FTSE as of January 31, 2015

The reverse is true for some of the largest developed countries. For example, the U.S. comprises over half of the FTSE All-World Index but represents only 22% of the FTSE All-World GDP Weighted Index.  Similarly, the UK and Switzerland are assigned significantly larger weightings in the market cap weighted FTSE All-World Index.

Source: FTSE as of January 31, 2015

These differences can perhaps be better understood by examining the relationship between each country’s market size (measured by market cap) and economic size (measured by GDP). In many developed countries, the equity market has played a significant role in providing a source of finance for economic activity and these countries tend to have a higher ratio of market capitalization to GDP. 

Conversely, market cap/GDP ratios are generally lower for emerging economies whose local companies rely on other sources of finance like bank loans and retained earnings. As the below chart illustrates, on average the market cap/GDP ratios for EM countries are lower than those of developed countries. 

Source: World Bank 2012

In essence, a significant gap between market size and economic size exists for many EM countries. As large emerging economies such as China, India and Indonesia make strides toward growth, index construction can be an important consideration when determining desired country exposures.  



© 2015 London Stock Exchange Group companies.

London Stock Exchange Group companies includes FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), MTS Next Limited (“MTS”), and FTSE TMX Global Debt Capital Markets Inc (“FTSE TMX”). All rights reserved.

“FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication.

Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put.

The London Stock Exchange Group companies do not provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. The London Stock Exchange Group companies make no representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the London Stock Exchange Group companies. Distribution of the London Stock Exchange Group companies’ index values and the use of their indexes to create financial products require a license with FTSE, FTSE TMX, MTS and/or Russell and/or its licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.


Blog Listing Page