In the report, MSCI stated, "[t]he MSCI Greece Index is structurally no longer in line with Developed Markets size requirements with only two index constituents. If these two remaining index constituents were to experience further decrease in size, MSCI may be forced to discontinue the calculation of the MSCI Greece Index."
As Greece’s economic picture notably darkens and its equity market plunges, the country has become a smaller part of MSCI World Index. In May 2010, the MSCI Greece Index accounted for 0.16 percent of the MSCI World Index. That percentage was just 0.03 percent in May 2012.
"In addition, the Greek equity market is the only Developed Market in which in‐kind transfers and off‐exchange transactions are prohibited and stock lending as well as short selling practices are not well established. This has created significant concerns for market participants and in particular for passive portfolio managers. The Greek authorities have not been receptive to repeated complaints from the international investment community and did not manage to bring equity market regulations and practices in line with the evolving standards of Developed Markets," MSCI said in the statement.
The Global X FTSE Greece 20 ETF GREK, the lone Greece-specific ETF on the market today, does not track the MSCI Greece Index. GREK follows the FTSE/ATHEX 20 Capped Index - but regardless of the index the ETF tracks, it could be vulnerable to declines should Greece be demoted to emerging markets status.
In other reclassification news, South Korea and Taiwan have retained their emerging markets status with MSCI. Other index providers such as FTSE and Standard & Poor’s have classified South Korea as a developed market for several years, but MSCI has yet to make the move. Taiwan has also been on the block for promotion to developed markets status for several years only to be continually viewed as a developing nation by MSCI.
MSCI acknowledges that its South Korea and Taiwan indexes continue to meet most of the criteria for developed markets status. Those indexes are tracked by the iShares MSCI South Korea Index Fund EWY and the iShares MSCI Taiwan Index Fund EWT.
MSCI once again denied Qatar's and United Arab Emirates' ('UAE') promotions to emerging markets status. The two Middle East nations will retain the frontier markets designation until the next annual reclassification review. Both countries have failed three times to make the leap to emerging status from the higher risk frontier markets label. The last failure came in December 2011.
ETFs with large weights to Qatar and UAE include the PowerShares MENA Frontier Countries Portfolio PMNA, the Market Vectors Gulf States ETF MES, and the WisdomTree Middle East Dividend ETF GULF.
Morocco has been put on review for possible reclassification to frontier status from emerging markets status, according to the MSCI statement.
Another country that could be in trouble with MSCI is Argentina. South America’s second-largest economy is already a frontier market, so it is not on review for a downgrade. Rather, Argentina could be removed from the MSCI Frontier Markets Index if the government there remains hostile to free market principles.
"MSCI continues to monitor closely the situation in Argentina following the nationalization of YPF through the “expropriation” of a 51% stake from the Spanish company Repsol by the Argentinean government. Any further such government intervention in the “free‐market” economic system may force MSCI to launch a public consultation with the investment community on a potential exclusion of the MSCI Argentina Index from the MSCI Frontier Markets Index," MSCI said in the statement.
The Global X FTSE Argentina 20 ETF ARGT has tumbled over 20 percent since mid-April when the Argentinian government announced plans for the nationalization of YPF S.A. YPF. ARGT does not track an MSCI index. Rather, it is linked to the FTSE Argentina 20 Index, but Argentina’s departure from the MSCI Frontier Markets Index could result in further pressure on the ETF and Argentine equities. MSCI stripped Argentina of its emerging markets status in 2009.
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