In its March 2020 Interim Country Classification Review, FTSE Russell confirmed that Peru will be stripped of its Secondary Emerging Markets status and will subsequently sit in within the Frontier Markets bracket.
Due to only one Peruvian stock being in the FTSE Global All Cap Index, FTSE stated that Peru no longer satisfies the new minimum market cap and securities count requirement criterion, which was updated in January earlier this year, for it to remain as a Secondary Emerging Market. As a result, the South American nation will be reclassified as a Frontier Market later this year in September 2020.
The Lima Stock Exchange (BVL), Peru’s flagship stock market, issued a response to the decision to downgrade:
This decision is due to changes in the FTSE methodology made in January 2020. It increased the requirements to classify a country as an Emerging Market.
It is important to remember that index providers are private companies, with their own methodologies and they act in competition. Therefore, the decisions that an index provider such as MSCI, FTSE or S&P may make are not necessarily replicable among the other index providers.
Regarding MSCI, a main benchmark for emerging markets, there is no consultation about the Peruvian market. In addition, all the 3 Peruvian stocks constituents of the MSCI Emerging Market Standard Index meet the size and liquidity criteria to keep Peru on this index.
As of the end of March 2020, Peru’s weighting in the FTSE Emerging Index and FTSE Global All Cap Index was 0.02% and less that 0.01% respectively. Morgan Stanley Capital International (MSCI), one of FTSE’s main rivals, will maintain the three Peruvian stocks (Compañía de Minas Buenaventura, Credicorp and Southern Perú) in its MSCI Emerging Markets Index as they still meet the requirements to remain in the Index.
Peru may be the only South American country in FTSE’s Frontier Markets bucket if Argentina is officially stripped of its Frontier Market status, pending the potential removal of capital controls that it had implemented last year. Argentinian equities have already been removed from the Index and the country as a whole may move to “Unclassified” market status if the situation is to remain the same.
FTSE has also announced that Romania will join the Secondary Emerging Markets list, as well as Tanzania’s introduction into the Frontier Markets list.