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MSCI’s Upcoming Consultations: 5 Things to Look Out For

Morgan Stanley Capital International (MSCI) will be announcing the results of multiple consultations regarding market classifications of a handful of countries in the near future. Here are five things to keep a close eye on.

1. Argentina’s ascension from Frontier to Emerging Market

President Mauricio Macri has taken bold steps to reform Argentina’s economy and his attempts haven’t gone unnoticed as MSCI considers upgrading the South American nation to an Emerging Market.

Argentina has been a consistent performer over the last 18 months, regularly featuring as one of the best performing Frontier Markets on a monthly basis and posting a 23.7% gain between the start of the year and the end of April, as well as a 44.9% return in 2016. The MERVAL, Argentina’s stock exchange, is currently trading a record high levels, a fair indication of investor sentiments in the country.

merval

The MERVAL is trading a record levels (source: Bloomberg)

Aside from an improvement in foreign direct investment into Argentina – arguably one of the main drivers in a 3% predicted expansion in the economy for 2017 – BlackRock’s iShares also welcomed a new addition to its ETF range: the iShares Argentina and Global Exposure ETF.

2. Nigeria’s possible removal from the Frontier Market Index

There’s upbeat news for some markets and dark news for others and, sadly, Nigeria falls into the latter category as MSCI is currently considering the African nation’s position as a Frontier Market.

Rigidity in FOREX markets, an over-reliance on oil and various political crises have scared investors away and contributed in large outflows from domestic markets. MSCI will pay particular attention to liquidity in markets before announcing whether or not Nigeria will retain its Frontier Market status.

MSCI also simulated a scenario for its Frontier Market index without Nigeria, Argentina and Pakistan, which could be a sign that the index compiler is serious about the country’s removal. 11 stocks, including the likes of Nigeria Breweries, will be removed, paving way for Bangladesh, Kuwait and Vietnam to be the largest countries in the index with 16, 15 and 14 companies respectively.

Nigeria’ stock exchange endured a 4.12% decline between the beginning of the year and the end of April. The poor performance of Global X’s MSCI Nigeria ETF prompted the implementation of a reverse share split in order to return the price to a “suitable” trading level.

3. Pakistan’s inclusion in the MSCI Emerging Market Index

Pakistan’s long awaited return in to the Emerging Market Index will finally come to fruition this month. Investors have been highly optimistic in the country ever since MSCI’s announcement last year, culminating in the Karachi Stock Exchange receiving record levels of inflows that pushed it to an all time high on Friday 12th May 2017.

MSCI also simulated what its Frontier Market Index will look like without Pakistan, with the likes of Kuwait, Argentina (assuming that it remains as a Frontier Market) and Vietnam being the largest members in the index with shares of 21.3%, 18.7% and 11.64% respectively.

Pakistan has enjoyed an array of good news, especially on a macroeconomic front. Ratings agency Moody’s maintained the Asian economy’s B3 credit rating, citing improved inflation and attempted to reduce the fiscal deficit as rational for its decision. Meanwhile, Pakistan’s finance minister, the United Nations and International Monetary Fund have all forecast growth rates of over 5% for the year.

4. What’s the deal with China’s A-Shares?

MSCI announced in June 2016 that China’s A-Shares would not be included in the MSCI Emerging Markets Index for three main reasons:

  1. 20% monthly repatriation limit for foreign investors.
  2. Effectiveness of a new trading suspension mechanism.
  3. Pre-approval requirements by local exchanges regarding the launch of financial products.

China has taken steps to address points 2 and 3, though the 20% repatriation limit in point 1 still remains. Nonetheless, MSCI declared a consultation on the potential inclusion of the A-Shares in May 2017., with large asset managers such as BlackRock supporting the move to place these shares in the Emerging Market Index.

The main discussion points in the consultation will look at how “investable” the A-Shares will be, the level of accessibility to such shares and if there will be a broad improvement across the board. If included, China’s A-Shares could possible account for a very small portion in the index, a figure that stands at 0.5% according to MSCI’s simulated analysis.

5. Saudi Arabia’s quest to officially be classed as an Emerging Market

Many officials in Saudi Arabia made their intentions clear of Saudi Arabia being included in MSCI’s Emerging Market Index by the end of 2018, but their wishes could come sooner depending on the index provider’s findings.

Major obstacles preventing the country’s inclusion in the index boil down to restrictions on foreign ownership. Khalid al-Hussan, chief executive of Tadawul (Saudi Arabia’s stock exchange) believes that the relaxation of such barriers will significantly boost chances of inclusion.

There are massive plans on the horizon for the Middle Eastern economy, including its diversification away from the reliance on oil, the initial public offering of its flagship oil company Aramco and a $40 billion investment in US infrastructure.

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About James Eugene (50 Articles)
Interested in many (maybe too many) things. Football, Politics and Emerging & Frontier Markets, to name a few. Twitter: @James_Eugene

3 Trackbacks / Pingbacks

  1. MSCI’s May Review: 4 New Additions to the Frontier Market Index – Frontier Market News
  2. May 2017’s Best & Worst Performing Frontier Markets – Frontier Market News
  3. Nigeria: Top 5 Stocks Behind the Market’s Rebound – Frontier Market News

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