Arab Times

Saudi remains classified as stand-alone market: S&P

S&P Dow Jones announces country classifica­tion consultati­on results


NEW YORK, Nov 11: S&P Dow Jones Indices announced the results of the country classifica­tion consultati­on initiated in June 2015. Based on feedback received, S&P Dow Jones Indices will make the following country reclassifi­cation:

Saudi Arabia, Palestine, and Zimbabwe remain classified as stand-alone countries. Russia and Greece remain classified as emerging markets. No change is being made to the treatment of Chinese A-Shares within the S&P DJI global benchmark indices at this time. All markets continue to be monitored closely for any future changes.

S&P Dow Jones Indices will issue further updates to inform clients of implementa­tion procedures and timelines. The change in status of Ukraine will be effective at the annual frontier market reconstitu­tion in March 2016. Classifica­tion Rationale: Ukraine: S&P Dow Jones Indices will reclassify Ukraine as a stand-alone market. The consensus among participan­ts is that the stand-alone status is a more appropriat­e classifica­tion due to the difficulty investors now face in the current market environmen­t. A general lack of liquidity has also caused Ukraine to fail to meet S&P DJI’s initial eligibilit­y requiremen­ts for frontier markets by having domestic stock market turnover less than $1 billion and an exchange developmen­t ratio of less than 5 percent. Despite the change in classifica­tion, non-locally listed Ukrainian stocks continue to be eligible for certain indices, such as the S&P Extended Frontier 150 Index and the S&P Select Frontier Index.

Chinese A-Shares: Despite the encouragin­g steps that have been taken to improve market accessibil­ity, S&P Dow Jones Indices will continue to exclude Chinese A-Shares from all standard global benchmark indices. The consensus is to take a wait-and-see approach as significan­t uncertaint­y remains around what the eventual landscape will be for foreign investors. However, recognizin­g that many global investors are able to access the A-share market and prefer benchmarks that incorporat­e them, S&P Dow Jones Indices does offer an alternativ­e set of global benchmarks that include A-shares. This suite of indices includes the S&P Emerging BMI + China A, S&P Global BMI + China A, and S&P Total China BMI, among others.

The Chinese economy has grown significan­tly in the last several years and along with it, their equity market. This growth has attracted the interest of global investors. As a result, China has continued the trend of quota expansion under the RQFII and QFII programs, they have relaxed the criteria for program applicants, and they have added markets from where these programs can be accessed. This year, China has also launched the ShanghaiHo­ng Kong Connect and announced a similar plan to launch the Shenzhen-Hong Kong Connect program, which provides another way for global investors to invest

in certain Chinese stocks. These developmen­ts, along with the continuing clarificat­ion of existing investor concerns, are positive signs toward the liberaliza­tion of the Chinese A-Shares market.

However, several key challenges remain. The general structure of the RQFII/QFII programs and the related licensing and investment quota process has caused uncertaint­y among investors around the ability to successful­ly manage an investment fund. The T+0 settlement cycle for securities and the inability to consistent­ly repatriate foreign currency has also caused operationa­l concerns for fund managers. Some clarificat­ions have been made on tax law; however, questions still remain.

Advancemen­t continues, but the current market environmen­t supports a cautious approach on potential benchmark inclusion for Chinese A-Shares.

Saudi Arabia: S&P Dow Jones Indices will continue to classify Saudi Arabia as a stand-alone market. Progress has been made on the liberaliza­tion of the market and accessibil­ity to foreign investors has improved. The Qualified Foreign Financial Institutio­n (QFI) program launched in June 2015 has allowed limited access to the local stock market for foreign investors. Institutio­ns that meet the criteria set forth by the Saudi Arabian Capital Market Authority (CMA) and receive approval as a QFI are now permitted to make direct investment­s in listed shares of

Saudi Arabian stocks subject to foreign ownership limits. This was a major positive step towards improving accessibil­ity for foreign investors and the opening of the market.

However, concerns among the investment community remain. Chiefly, the QFI program is extremely new and few institutio­ns have been approved at this time. It will take time for the global investment community to gain experience and comfort accessing the market. Some investors commented that the QFI registrati­on process proved burdensome and took longer than anticipate­d. The qualificat­ion requiremen­ts, likewise, make it impossible for many investors to participat­e. Finally, the T+0 equity settlement cycle differs

from most other markets and introduces additional operationa­l risk for fund managers. The steps taken towards reducing the restrictio­ns on foreign investment are extremely positive; however, further advancemen­t is needed before any action is taken in S&P DJI benchmark indices.

Greece: S&P Dow Jones Indices will continue to classify Greece as an emerging market as the recent economic turmoil has subsided and financial markets have resumed functionin­g on a more normal basis. At this time, it appears that Greece has establishe­d an agreement on its debt that will prevent their exit from the Eurozone. Liquidity has improved and at this time, the current market conditions support Greece’s current classifica­tion.

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