June 24, 2020 (MLN): This time around, Morgan Stanley Capital International (MSCI), the creator and provider of benchmark equity indexes, in its Market Classification Review for 2020  released today, has mainly focused on the status of different markets across the board, rather than focusing on any addition or deletion.

In its review, it warned that the MSCI Argentina Index may be removed from the MSCI Emerging Markets Index if there is further deterioration in market accessibility.

“While volatility increased dramatically due to the COVID19 pandemic, global equity markets remained accessible and continued to function well, allowing issuers to raise capital and investors to manage risk during the crisis,” said Dimitris Melas, Global Head of Equity Research and Chairman of the MSCI Index Policy Committee. However, Dr. Melas added, “In the last 12 months, two important Emerging Markets, Argentina and Turkey, suffered substantial deterioration in market accessibility that could lead to their exclusion from the MSCI Emerging Markets Index “, the review report stated.

MSCI announced that it will continue consulting with market participants on the classification of the MSCI Argentina Indexes, as international institutional investors continue to be subject to stringent capital controls which were put in place in September 2019, making it impossible for international investors to access the domestic equity market.'

“The MSCI Argentina Indexes remain replicable, as only foreign listings are currently eligible for index inclusion, but the imposition of the current capital controls is not in line with the market accessibility criteria of the MSCI Emerging Markets Indexes,” said Sebastien Lieblich, Global Head of Index Solutions and Chairman of the MSCI Equity Index Committee. Mr. Lieblich added, “The Argentinian authorities must realize that the prolonged application of capital controls or the introduction of further capital controls may force the reclassification of the MSCI Argentina Indexes from Emerging Markets status to either Frontier Markets or Standalone Markets status,” the report highlighted.

It further stated that MSCI will consult on the potential reclassification of the MSCI Argentina Index as part of the MSCI 2021 Market Classification Review. However, any event that results in further deterioration of market accessibility will prompt MSCI to remove the MSCI Argentina Indexes from Emerging Markets as soon as practicable.

Additionally, MSCI declared that it may launch a consultation on a reclassification proposal for the MSCI Turkey Index to Frontier Markets or Standalone Markets status if the already deteriorating accessibility level of the Turkish equity market were to worsen further. As highlighted in the MSCI 2020 Market Accessibility Review released on June 17, 2020, the accessibility level of the Turkish equity market has been adversely impacted by the introduction of short selling and stock lending bans in October 2019 and February 2020, respectively. These bans severely restrict the ability of institutional investors to express active investment views and hedge portfolio risk.

MSCI also announced today that it will reclassify the MSCI Iceland Index from Standalone Markets to Frontier Markets status. The capital controls, including the Special Reserve Ratio, were removed on March 6, 2019. While certain reporting requirements for fund repatriation remain in place, based on feedback from market participants, this no longer materially impacts the accessibility of the Icelandic equity market for international institutional investors.

Apart from this, MSCI noted that some market accessibility issues have been recently observed in select Frontier Markets. The Nigerian equity market has been impacted by the significant deterioration of liquidity in the Nigerian FX market. Lebanon has been subject to capital controls which were introduced in October 2019. The Bangladesh Securities and Exchange Commission (BSEC) introduced a floor price (set at the average of the closing price of the immediately preceding five trading days) applicable to all securities listed on the Dhaka Stock Exchange in March 2020, resulting in substantial drop in trading liquidity.

“While such accessibility issues may be viewed by market participants as part of the inherent characteristics of Frontier Markets, these developments have a negative impact on the replicability of the indexes. Therefore, MSCI will continue classifying these markets as Frontier Markets until further notice, while applying a special treatment to potentially reduce the number of changes in the related indexes and mitigate the index replication concerns,” review report said.

As a reminder, MSCI will implement the reclassification of the MSCI Kuwait Indexes from Frontier Markets status to Emerging Markets status in one step coinciding with the November 2020 Semi-Annual Index Review (SAIR), the report underscored.

Copyright Mettis Link News

35412