Reclassification on the cards for some
THE STOCK markets of the world’s developing economies are about to undergo a kind of a revolution.
As index provider Morgan Stanley Capital International (MSCI) prepares to carry out its annual review in June, some of the world’s biggest and best-performing equity markets – with assets totalling almost $9 trillion (R118trln) – are poised for reclassification.
MSCI downgraded Pakistan from an emerging market to a frontier nation in 2009 after it imposed a floor on the stock index to curb excessive selling during the financial crisis. The market’s size has since grown about five fold.
The nation began trading as an emerging market yesterday. Investors expect it to have a 0.2 percent weighting in the MSCI Emerging Markets Index, and get anywhere between $300 million to $550m in inflows from tracker funds.
Pakistan’s economy may grow about 5 percent this year, according to Mattias Martinsson, the Stockholm-based chief investment officer at Tundra Fonder, which holds about $150 million in Pakistani stocks.
Two years after the kingdom opened its stock market to global investors, foreign ownership has languished at about 5 percent and the equity index has lost about 30 percent. The market’s size fell by roughly $140 billion as the changes coincided with the government’s austerity measures.
As part of its plan to revamp the economy and reduce dependence on oil revenue, Saudi Arabia is now seeking inclusion in MSCI’s emerging-market gauge. The country says its bourse has met all the criteria, and there are now enough institutional investors to give the index provider feedback on the investment process.
The country introduced short selling and will probably add a range of sophisticated financial products. An initial public offering by state-run Saudi Aramco may provide the breakthrough the country has been looking for in terms of foreigners’ interest.
The country, struggling to restore investor confidence in its currency, has seen its benchmark stock index lose more than 30 percent in dollar terms over the past 12 months. MSCI is considering whether to downgrade Nigeria from a frontier nation to a standalone market.
Investors are giving a thumbs up for a foreign-exchange window that started in April, which allows them to repatriate funds or value their naira holdings at rates more closely aligned to the informal market. A US exchange-traded fund focusing on Nigeria has seen inflows after the start of the new mechanism.
Investors are now making a case for MSCI to use the price of the naira on the window to value stocks instead of the tightly controlled interbank rate.