Dave Malhotra

Why Are Emerging Market Prices So Volatile?

I am not convinced your argument--yet. To use China as an example, I looked up the total asset value of FXI. As of 1/30/07 it was USD 5.486 Billion. (from www.ishares.com/fund_i...;symbol=FXI). This doesn't seem like enough to cause much volatility in the underlying shares when you consider that one of its twenty-five underlying components, China Mobile, alone has a market cap of HKD 1.5 Trillion (which converts to USD 192 Billion). I don't know what the aggregate market cap of all the FXI components is together, but it is surely huge relative to FXI's asset value.

However I am wary of my own analysis because I know its misleading to use market cap because of the large amount of non-tradeable shares. Non-tradeable shares lead to inflated market caps, so using market cap in my comparision is misleading to the degree that the market caps are inflated. Also I know there are many other ETFs, Closed-end funds and ADRs besides FXI that foreigners can buy that would result in the flow-of-funds into the Hong Kong and mainland exchanges. One would need to total all of these sources of foreign/developed world money and compare it to the domestic Chinese/HK money invested. Things are further complicated by the fact that there are difference classes of shares which would each have different levels of foreign and domestic investment.

I guess what it really boils down to is this: Is there data on the developed countries' flow-of-funds to the emerging market so we can compare them to domestic funds? I'm particularly interested in a breakdown of foreign funds going into Chinese A shares, B shares, H shares and red chips...

dave