Saudi Arabia
Some investors believe MSCI may also consider raising Saudi Arabia, whose Tawadul Stock Exchange includes $400 billion of equities, to emerging-market status. Bill Greiner, who advises clients on ETF investing as chief investment strategist at Kansas-based Mariner Holdings, said that move would be a game changer. Currently a standalone market, the Persian Gulf nation would have a larger weighting than Russia in MSCI’s emerging-market benchmark if it’s upgraded, Greiner said.
Credit Suisse Group AG thinks an upgrade is unlikely in this round. Saudi Arabia’s plan to ease restrictions on foreign stock investors will increase its chances of earning MSCI’s emerging-market status only by June 2019.
Pakistan and Peru
Neither Peru nor Pakistan would move the needle for money managers because “your tracking error for completely ignoring” will be small, said Andrew Howell, New York-based frontier markets analyst at Citigroup Inc. The developing-nation benchmark has three Peruvian companies that make up less than 0.5 percent of the gauge.
Pakistan was downgraded to frontier-market status in 2008 after the Karachi gauge imposed a “floor rule” that caused near total paralysis of local market activity for more than three months. It made the move to stop a plunge that wiped out $36.9 billion of market value after then-President Pervez Musharraf left office to avoid impeachment.
MSCI put Peru on review after warning last year that not enough companies meet the size and liquidity requirements for emerging-market equities. MSCI decided in a separate review in May to keep Southern Copper Corp. in its Peru index, giving a boost to the Andean nation as it seeks to avoid demotion.
Argentina, Vietnam and Nigeria
Citigroup’s Howell expects Argentina and Vietnam to be put on review for potential reclassification as emerging markets, in recognition of their increasing liquidity, size and accessibility for foreign investors.
While MSCI concluded in April that it will keep Nigeria in the frontier-market basket, lack of improvement on the government’s restrictive capital and foreign exchange controls may put the African nation back on the chopping board, Howell said.
If Nigeria is excluded from the benchmark, “it will make it harder for frontier funds to raise money, because it makes it tougher to pitch the frontier market story if one of your largest markets has so many problems that it has to get kicked out of the index group,” he said. “That’s just bad publicity for the whole asset class.”