The Morgan Stanley Capital International/Barra Europe, Australasia, and Far East Index, more commonly called the EAFE Index, is a stock market index that shows the relative prominence of companies outside of North America. This index rates companies based on the relative value of their outstanding shares. It focuses primarily on companies in fully developed countries, but some member countries are much more developed than others. The EAFE Index has been in operation since December of 1969, making it the oldest fully international stock market index.
A stock market index is a method of illustrating the value of a portion of the stock market. Indexes typically have a specific area that they focus on, often a particular part of the world or a business type. Good indexes are large enough to give an accurate picture, but small enough to keep the information specific.
Morgan Stanley Capital International/Barra (MSCI Barra) is a wholly independent portion of the Morgan Stanley Financial Group. While the entirety of Morgan Stanley is an investment consulting group, MSCI Barra focuses completely on international investment opportunities. The company maintains several indexes of prominent international companies, one of the most important parts of being in the EAFE Index.
The EAFE Index technically covers countries outside of the United States and Canada. In reality, it doesn’t have any countries from North or South America; it only covers 21 countries in Europe, the Middle East, Asia, Australia and the Pacific. In practice, this eliminates many of the business that are heavily influenced by the fluctuations in the United States’ economy. While some fluctuations do affect these business, it is to a much smaller degree than ones in the Americas.
Like many large indexes, the EAFE Index rates companies based on market capitalization. This means that the relative value of a company is based on the value of its outstanding shares, shares that may be purchased or traded. As the price of these shares goes up and down, the relative value and position of the company changes. This makes the index very fluid, particularly among the smaller businesses.
This index is used as a benchmark for investment. Many international operations base their success or failure against the results of the EAFE Index as a whole. The reason for this is simple; the EAFE Index is quite old in investment terms. Since its beginnings in 1969, it has become a staple of modern international investment strategy. The majority of people working in the current investment market don’t remember a time when this index didn’t mold their view of the international market.