MSCI announced the results of its 2013 annual classification review late last night, confirming the two Middle Eastern countries would, following a number of false dawns, be upgraded from frontier market status in May 2014. The upgrades will coincide with MSCI’s May 2014 semi-annual index review.
MSCI also confirmed it is to reclassify the indices of Morocco and Greece from emerging market status to frontier and from developed market to emerging market status respectively. Both indices will be reclassified as part of the MSCI November 2013 semiannual index review.
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The global index provider is used by pension schemes and investors around the world to decide asset allocation and so a change in classification can have serious consequences for a country’s economy. An upgrade can potentially mean a much higher weighting of global assets are allocated towards a country’s index, therefore increasing foreign direct investment.
In reclassifying the Qatari and UAE indices, MSCI said market participants recognised progress made by the relevant authorities in both countries in enhancing the “delivery versus payment model” – something which had previously prevented MSCI from making the upgrades.
MSCI did however warn that Qatar must address the current 25% foreign ownership limit on its companies, particularly given the upgrade is likely to result in increased foreign investment.
Sam Vecht, head of the emerging markets specialist team at BlackRock and portfolio manager of the firm’s Frontiers Investment Trust, said the decision to upgrade the countries “reflects a growing realisation of how far these economies and their financial markets have developed in recent years” but is unlikely to have any near-term impact on the management of client portfolios at BlackRock.
BlackRock expanded its absolute return suite with a fund launched for Vecht in January, read our analysis here.
Not all bad for Morocco
MSCI’s decision to downgrade the Morocco index to frontier market status has not come as a surprise, with MSCI pointing out in its review that the index has failed the emerging market liquidity criteria “for several years”.
However, the downgrade is not necessarily all bad news for the country according to Vecht.
“We have extensive investment experience in Moroccan equities and believe that the market is looking increasingly attractive having underperformed in recent years,” he said. “The point at which many others are selling is often a good time to buy.”
MSCI said the Greek index was downgraded to emerging market status as it failed to meet the developed market criteria on multiple fronts, including securities borrowing and lending facilities, short selling and transferability.
The indices of both Korea and Taiwan were also reviewed for possible inclusion in the developed market index, however MSCI said both will remain under review.
Click here to download a full copy of the MSCI 2013 annual market classification review.
