(MENAFN- Arab Times) Â MSCI announced the following changes in its indices on Wednesday:
* Qatar and the UAE will be upgraded from Frontier Market to Emerging Market status effective May, 2014.
* Morocco will be downgraded from Emerging Market to Frontier Market status, mainly due to lack of liquidity, effective November, 2013.
* Greece will be downgraded from Developed market to Emerging Market status effective November, 2014.
* MSCI also confirmed it is monitoring the situation in Egypt, and particularly the availability of foreign currency, closely, and this could result in Egypt's exclusion from the Emerging Market index.
For the UAE and Qatar, this is obviously positive. It should however be noted that, certainly as far as the UAE is concerned, this has been at least partly priced in (DFM +45.35% YTD, ADX +35.57% YTD). The combined weighting of Qatar and the UAE should be around 80 bps, with Qatar about 5 bps higher than the UAE.
However, this also has important implications for the Frontier Market Index. The highest weighting in this index at this point in time is Kuwait, with 23.1%. Qatar has a weighting of 15.4% and the UAE is 11.9%, the second and fourth largest weightings respectively (third is Nigeria with 16.3%). Morocco is expected to be considerably smaller than either Qatar or the UAE: in sheer market capitalization terms, Morocco is one-third the size of Qatar. Morocco at this point in time has a weighting of just 8 bps in the Emerging Market index. Assuming the unadjusted market capitalization ratio is a good proxy for the Frontier Index weightings, Kuwait's weighting in the index would increase significantly, to just over 30% in our view.
Initially, in the period between November 2013 (Morocco enters the Frontier Market index) and May 2014 (the UAE and Qatar exit), Kuwait's weighting will actually decrease. However, given the small size of Morocco, we estimate this decrease will not be significant (less than 100 bps). This should provide significant additional liquidity into the Kuwaiti market, and therefore be a positive for Kuwait.
Longer term, we feel there is a question mark on the Frontier Market index, as close to 50% of the index will be concentrated in just two markets (Kuwait and Nigeria). MSCI, the most widely used equity index provider, prompted market fears about both Greece and Egypt on Wednesday, after demoting the former and then raising concerns about getting money out of the latter. MSCI redesignated Greece an emerging market late on Tuesday, 12 years after its promotion from the category, assigning it a tiny 0.3 percent weighting - far less than it had when last in the emerging index. In a follow-up conference call on Wednesday, an MSCI official then triggered worries about Egypt when he said the firm had had reports of investors having difficulties with currency when repatriating money out of Egypt.
Greek stocks fell sharply and the bond yield curve inverted further, meaning longer term debt returned less than shorter term, a sign of investor fear about Athens' ability to pay. Egypt's stock market fell more than 2.5 percent. The Greek move, which means pension funds and more cautious investors will have to move out of the Athens stock index , left Greece with less weight in MSCI's emerging market index than the 0.4 percent index weight assigned to Qatar and the United Arab Emirates. Those two are former frontier markets that MSCI will include in the emerging markets index from mid-2014. It is also far smaller than the 5 percent share Greece had held before its 2001 promotion, making it one of the smallest constituents of the emerging markets index MSCI, whose indices are tracked by $7 trillion worldwide and $1.3 trillion in emerging markets alone, nonetheless said less stringent entry criteria for the emerging index meant that a number of Greek companies would be eligible to join, as opposed to just two that are in the developed index.
"We would at the time of change, which would be November, apply the new threshold for inclusion.. It will become a broader, more representative index," MSCI managing director Remy Briand told reporters. "Whether it benefits the equity market or not...it's hard to gauge whether there will be more interest," he said. Greece at present has a tiny 0.01 percent weight in the $29 trillion market cap developed index but the relatively small size assigned to it effectively dash any hopes the country would benefit from being a big fish in a small pond.
Earlier this year Russell Indexes which is tracked by $3.9 trillion, also downgraded Greece. A third major provider, FTSE, has it on review for switch to emerging markets. The Athens stock market fell 1 percent on the day and 10-year Greek bond prices fell more than the 30-year issue, continuing a recent sell off. "There are some pension funds whose mandates are to invest in developed markets only. They will be forced sellers. That will more than offset buyers because there is so much more money tracking the developed index," said Patrick Armstrong, a fund manager at Distinction Asset Management in London.
MSCI's Briand said his firm was being told by clients about problems with currency when repatriating money out of Egypt, where political turmoil has deterred foreign investors. "We have no proposal to change anything in the index but we have investors giving us (this) feedback," he said. "We have highlighted that the situation in Egypt regarding the currency is being monitored very carefully." The firm said in a statement that it may be forced to launch a public consultation with the investment community on a potential exclusion of the MSCI Egypt Index from the MSCI Emerging Markets Index were the situation to worsen.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.