How MCAP Sank Indonesia and How It Can Sink Your Emerging Market Too!
This is how Indonesian IDX 30 a popular benchmark looks like since 2018.
What does this mean?
It indicates that since 2018, every investor in an Index fund has seen diminishing returns. This suggests that the Indonesian market has been unappealing, implying potential shortcomings in government strategies and structural issues within the country.
But is this the true picture?
Not quite. Contrary to this perception, the Indonesian economy has experienced significant growth during this period and continues to thrive.
Then why doesn’t the stock market accurately reflect the economy? Who conceived this misalignment, and why hasn’t it been challenged?
The culprit is MCAP, an outdated methodology with a winner’s bias that overvalues certain sectors. It’s effective when the ‘winners’ thrive but fails to adjust quickly when they falter. For instance, if the financial sector which constitutes near 50% of the index (like the IDX 30), is struggling, the entire market is adversely affected due to MCAP’s heavy reliance on this sector.
Despite its flaws, the MCAP methodology, tracing back to 1871, gained prominence because it was convenient to use, inflated values were attractive, and foregone profit was an advanced thinking. Most of our Indexes and passive investment strategies are tied to MCAP.
Why hasn’t it been questioned?
Academics have raised concerns but have not come up with a better design and consistency profitable alternative. While Investors, lacking awareness, haven’t challenged the prevailing investment thesis of passive investing and MCAP indexes and rather naively believe it to be invincible. Education and industry-led innovation are crucial for change, but the industry, benefiting from the status quo, lacks incentive to disrupt itself.
Enter AlphaBlock. Why can AlphaBlock succeed where others haven’t? Why hasn’t scientific innovation permeated finance?
AlphaBlock, a cutting-edge scientific company, is bridging this gap. We challenge the century-old challenge in finance where Indexes are mistakenly seen as a major innovation. We’ve demonstrated that physics, often perceived as detrimental to wealth, is actually a solution to financial stagnation.
How has Indonesia become so progressive in adopting this approach, and which other countries are following suit?
Emerging economies, akin to startups, are more willing to embrace risk and innovation. India, Romania, Vietnam and a few African countries are among the countries adopting this new approach, with more joining the trend.
What’s at stake?
Beyond the obvious losses, missing out on higher profits and compounded earnings is significant. For instance, the E&R Indonesia 30 outperformed the IDX 30 by 20.4% annually over seven years. This could have quadrupled initial investments if applied to a fund.
Why should emerging market Stock Exchanges and managers care?
The future hinges on outperforming benchmarks and embracing innovation. Our indexing process at AlphaBlock is transparent. We invite you to understand, test, and challenge our models. If our claims withstand scrutiny, there’s no time to waste. Embrace this revolution and elevate your emerging market fund to new heights.
Join the Future of Investing:
By choosing AlphaBlock, you’re not just embracing innovative wealth generation; you’re also embracing responsible and sustainable practices. Together, we can forge a brighter financial future for both you and the planet. Take the next step in your investment journey—contact AlphaBlock today and become a part of the revolution. Unlock alpha. Embrace the future. Choose AlphaBlock.
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