Emerging markets investors to be put in Argentine and Saudi stocks

Emerging markets investors to be put in Argentine and Saudi stocks

Political and economic reforms open up new markets and opportunities

Investors in passive emerging markets funds will automatically be invested in Argentine and Saudi Arabian stocks from 2019 following index provider MSCI’s decision to add both countries to its emerging market benchmark, but Argentina’s long-term future in the index hangs in the balance.

MSCI last week said it would add 32 Saudi Arabia stocks to its emerging market index next year — equating to 2.6 per cent of the benchmark — as well increasing exposure to Argentina, which is currently mired in a currency crisis.

It follows MSCI rival FTSE’s decision in April 2018 to include Saudi Arabia in the FTSE Emerging Market index and means that all passive funds tracking those indices will have to adjust their portfolios and buy Saudi and Argentine stocks.

A total of $1.9tn in assets are benchmarked to MSCI’s emerging markets index. For countries such as Saudi Arabia and Argentina, promotion to the popular index means prestige, a recognition of recent reforms and access to fresh flows of international capital. For investors it means the chance to gain exposure to countries and currencies formerly considered too risky to be classed as an emerging market.

In recent years Argentina and Saudi Arabia have undergone political and economic reforms, under the aegis of pro-market president Mauricio Macri in Argentina and Crown Prince Mohammed bin Salman in Saudi. MSCI said last week it was satisfied that Saudi Arabia had opened itself up to greater foreign investment with changes to the country’s stock market, the Tadawul, the largest stock market in the Arab world.

MSCI rival FTSE made its own decision to add Saudi stocks to its emerging markets benchmark, which is tracked by $140bn of funds, after concluding that Saudi Arabia had become sufficiently “investor friendly” to be promoted. By December 2018 Saudi Arabia is expected to make up 2.9 per cent of the FTSE Emerging Markets index. In the past six months the MSCI Saudi Arabia index has returned 27 per cent. But it is heavily affected by the price of oil. By the end of next year, investors in passive funds tracking either the MSCI Emerging Markets or the FTSE Emerging Markets index will have almost 3 per cent of their funds invested in the country. “Saudi inclusion marks a significant milestone for a market that until now has been dominated by domestic investors,” said James McManus, investment manager at online broker Nutmeg.

The Saudi market could present problems for passive fund managers since its Sunday to Thursday opening hours do not match those of other markets. But Mr McManus said: “Given the broad geographic representation in emerging markets, market participants are adept at managing around closed markets and we don’t expect this to affect the performance of products.”

MSCI also said it would promote Argentina last week, nine years after the country was ejected from the MSCI Emerging Markets index in 2009. The country was originally demoted to the MSCI Frontier Markets index amid a global recession due to Argentina’s restrictions to capital flowing in and out of the country.

After a period of recovery the country hit a fresh crisis in April, with its currency and markets sliding. The MSCI Argentina index has shed 34.3 per cent in the past three months to June 25.

MSCI said it would only add a small amount — 0.4 per cent — to investors’ portfolios from May 2019 and said it was still nervous about the country. It added it was ready to review its decision on Argentina if the country attempted to tackle its current currency crisis with capital controls or restrictions.

MSCI will only add foreign-listed Argentina stocks to the index, due to international investors’ fears that the domestic market was illiquid, making it difficult to buy and sell stocks.

Ben Seager-Scott, chief investment strategist at Tilney Group, said investors’ portfolios were unlikely to be dramatically affected by the inclusion of the new stocks, even despite Argentina’s volatile market performance. “A tracker investment would have much more to lose from a mild underperformance of China, Korea or India than a catastrophic performance of Argentina,” he said. “It’s worth remembering the rationale is different for each one. Argentina was a constituent of the emerging market index prior to 2009, so if you were comfortable with it before then, you should probably be comfortable with it now.”

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