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Global index compiler MSCI is considering including Saudi Arabia and Argentina in its emerging market indexes at a review of its widely-tracked benchmark on Wednesday, and could potentially announce candidates that may join its indexes in future.
MSCI will announce the results of its Annual Market Classification Review on June 20 around 2030GMT. MSCI's gauges are used by investment funds worldwide, with some $1.7 trillion of active and passive money benchmarked against its EM indexes.
The following is a list of markets that could be re-classified:
MSCI will decide whether to reclassify Saudi Arabia and its $526 billion bourse to "emerging" from "standalone" status. The Gulf region's dominant economy opened capital markets to foreign direct investment in June 2015, initially with tough restrictions on investors outside Gulf Cooperation Council (GCC) countries.
Since launching an initiative two years ago to modernise its economy and society by 2020, Riyadh has been on a quest to liberalise investors' access. Policymakers are hoping inclusion in global equity indexes, as well as the planned privatisation of state oil giant Saudi Aramco, will bring big inflows of overseas money in 2019.
Officials predict a 5 per cent stake sale in Saudi Aramco, now expected to go ahead in early 2019, will raise $100 billion. Even without an Saudi Aramco IPO, Saudi Arabia's index would have a weighting of 2.3 per cent in MSCI's EM index — on a par with Malaysia and Thailand.
Featuring 32 stocks, Saudi would be the third-largest constituent country from the Europe, Middle East and Africa region, behind South Africa and Russia. Analysts expect an MSCI upgrade could attract around $10 billion in passive fund flows.
"Valuations are attractive relative to historical levels but high on a forward PE basis relative to the broader MSCI EM Index: 15 versus 12, respectively," Asha Mehta, portfolio manager at Acadian, wrote in a note to clients. If Saudi gets the nod, reclassification would happen in two steps as part of MSCI's May and August 2019 reviews.
Rival provider FTSE Russell decided in March to upgrade Riyadh to emerging market status while S&P Dow Jones announced in May it was consulting with investors on whether to upgrade Saudi Arabia to emerging market status.
MSCI will decide if Argentina can return to the "emerging" markets from its current "frontier" segment encompassing smaller and less developed stock markets.
Argentina's bourse, which currently has a market capitalisation of $98 billion, was relegated in 2009 after Buenos Aires introduced capital controls. But after assuming office in December 2015, centre-right President Mauricio Macri declared the country open for business and introduced sweeping pro-market reforms.
In 2017 MSCI surprised markets by not promoting Argentina, saying it needed more signs that reforms were "irreversible". Meanwhile Argentina's markets have been roiled in recent weeks after currency volatility forced Buenos Aires to ramp up interest rates to 40 percent and seek a $50 billion lifeline from the International Monetary Fund.
In May, MSCI said the recent market rout would make it more difficult to determine whether to award Argentina emerging markets status again. "With Argentina's orthodox response to recent volatility we would argue that Argentina ought to stand a better chance of making the transition, though MSCI might say that they still need more time to be sure," said Dan Salter at Renaissance Capital.
Returning to "emerging" status would see the MSCI Argentina index cut to ten from 15 constituents. The country would have a weighting of 0.6 per cent — on a par with the United Arab Emirates and Qatar. Argentina currently makes up nearly a quarter of the frontier markets index.
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