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Saudi Arabia joins Argentina in MSCI Emerging Markets club

Glenn Freeman  |  21 Jun 2018Text size  Decrease  Increase  |  
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saudi arabia emerging markets frontier upgrade

Argentina, the third-largest South American economy, behind Brazil and Mexico, was previously part of the MSCI Emerging Markets Index, before it was downgraded to a frontier market in 2009.

"This decision followed the broad acceptance of the reclassification proposal by market participants that took part in the consultation.

"In particular, international institutional investors expressed their confidence in the country's ability to maintain current equity market accessibility conditions, which is a key factor in MSCI's classification framework," according to statement issued by MSCI.

However, given ongoing political uncertainty in the country, it also noted it "would review its reclassification decision were the Argentinian authorities to introduce any sort of market accessibility restrictions, such as capital or foreign exchange controls".

As Morningstar's Emma Wall wrote last week, inclusion in the MSCI Emerging Markets Index means both active and passive funds can invest in companies listed in the country, and can add significant foreign investment.

Argentina's inclusion is conditional, with only foreign listings of Argentinian companies included, such as American Depositary Receipts. "International institutional investors stated that higher liquidity across the domestic market is needed before considering a shift from offshore to onshore listings," said MSCI, with this condition subject to ongoing review of the Buenos Aires Stock Exchange.

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Alexander Arevalo, a fund manager with UK's Jupiter emerging markets debt team, thinks the country is "taking the right steps" by going to the International Monetary Fund (IMF). Argentina's Government received a US$50 billion bailout from the IMF.

Emily Fletcher, a co-portfolio manager at BlackRock, says the announcement of Argentina's inclusion is "validation of the substantial positive macro-economic reforms that Argentina has enacted over recent years".

"The government has made good progress in dismantling the protectionist structures of the economy, addressing currency controls, export taxes and energy subsidies. 

"With a 1-year forward Price to Earnings ratio of around 10-times, and an already substantially devalued peso, the Argentine market looks attractive to foreign investors. Therefore, given the significant growth opportunities, we believe it represents a compelling investment destination for long-term investors," Fletcher says.

Speed of Saudi change

The inclusion of Saudi Arabia in the emerging markets index reflects growing confidence in the ongoing privatisation efforts within the Kingdom. "International investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority and the Saudi Stock Exchange (Tadawul) have demonstrated," says Sebastien Lieblich, MSCI managing director.

"Their expectation now is that the current privatization effort in Saudi Arabia will continue to grow the investable opportunity set available to them and hence, all other things being equal, contribute to an increased weight of Saudi Arabia in the Emerging Markets Index in the future."

The Kingdom's Capital Market Authority and Tadawul have further opened the domestic equity market to international institutional investors over the past three years. This included a complete overhaul of the Tadawul's operating model, across settlement, delivery methods and closing price mechanisms.

Regarding the Saudi inclusion, BlackRock's Fletcher notes the actions taken in recent years by Saudi Arabian authorities to further open the local equity market to international institutions.

"The Saudi Arabian market has much to commend it to a long-term investor, and in fact it could be one of the most sectorally diverse countries within the MSCI Emerging Market index," she says.

Commenting on emerging markets more broadly, Clint Abraham, portfolio specialist, Morningstar Investment Management says: “Notwithstanding recent volatility, expected returns in emerging market shares appear reasonable and they remain among our preferred regions".

Morningstar Investment Management favours Taiwan and South Korea within its emerging markets exposure. While the entry of Argentina and Saudi Arabia could present some interesting opportunities, it is still very early. Also, given their small scale relative to other emerging economies like China, "they don't really move the dial," says Morningstar Investing Management portfolio manager, Nimalan Govender.

 

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Glenn Freeman is senior editor with Morningstar Australia.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

 

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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