US$600b decision looms for Saudi, Argentina on MSCI

Upgrade could boost sentiment after selloff in developing markets

LONDON: Two nations divided by geography – and united by a history of financial protectionism – embarked on a journey toward more transparent markets three years ago. Today, they’ll learn whether foreign investors are ready to embrace their tales of transformation.

As MSCI Inc decides whether to promote Saudi Arabia and Argentina to emerging-market status, expanding the asset class by as much as US$600bil, it’s not just those nations that are on the edge. An upgrade for either or both could boost sentiment after a selloff that erased US$2.7 trillion from developing-nation equities since late January.

“Both Saudi Arabia and Argentina are stories of reforms,” said Julian Mayo, a money manager at Fiera Capital UK Ltd in London. “On whether they’ll continue on that path, my answer is a cautious yes. The MSCI decision will be a guide to the investment opportunity, but to investors, the fundamentals of these economies and businesses are more important.”

Smaller developing nations, called frontier markets, vie for emerging-market status because it can mean billions of dollars of foreign-investment flows from index-tracking funds. These so-called passive funds manage US$384bil in emerging markets, in addition to US$1.1 trillion of actively managed funds, according to JPMorgan Chase & Co.

“It’s not easy predicting MSCI decisions,” said Andrew Brudenell, a money manager at Ashmore Group Plc in London. Among many factors to be considered, he said, are the index provider’s demands for market openness and regulation and the process by which it satisfied itself that policy changes wouldn’t be rolled back.

Have Saudi Arabia and Argentina done enough to warrant an upgrade? Judging by stock-market performances, the Middle Eastern kingdom is on top.

This chart shows the size of the two stock markets relative to the US$18 trillion emerging-market universe. The potential for the MSCI upgrade has made the market in Riyadh a magnet for foreign investors, turning it into the world’s second-best performer this year. By contrast, waning confidence in Argentina’s economy, a currency slump and one of the world’s highest inflation rates is shrinking the Buenos Aires market.

When Saudi Arabia opened what was then one of the world’s most restricted stock markets to foreigners three years ago, it received a muted reaction. In a nation where women have been banned from driving and there were few investment opportunities beyond oil, investors didn’t see much of a long-term opportunity. That changed during the past year as Crown Prince Mohammed Bin Salman began a raft of reforms combined with a global charm offensive.

Modernising the Middle East’s biggest stock market and attracting foreign investors is part of his broader plan to shift the country’s economy away from oil, its main source of revenue. The proposed initial public offering of Saudi Aramco has also attracted the world’s attention.

For Argentina, which has relied on capital controls in the past and lost its emerging-market status nine years ago, it’s a question of reestablishing credibility.

President Mauricio Macri, who came into office in 2015, rolled back protectionist measures introduced by his predecessor, Cristina Fernandez de Kirchner. During his tenure, he settled a 15-year debt battle with creditors, ended capital controls and eased foreign access to the country’s markets. But almost three years later, the economy is under stress, the peso is in free-fall and foreign investors are moving away from equities.

An exchange-traded fund that tracks the MSCI gauge saw US$3.7bil of outflows in the five days through Monday, according to data compiled by Bloomberg. — Bloomberg

The MSCI decision will be a guide to the investment opportunity, but to investors, the fundamentals of these economies and businesses are more important. Julian Mayo