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MSCI Lifts Argentina, Saudi Arabia To Emerging Markets Status

June 21, 2018 11:15 am
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MSCI Inc. (NYSE:MSCI), one of the largest providers of benchmarks for use by issuers of exchange traded funds and index funds, said Wednesday it will promote Argentina and Saudi Arabia to the widely followed MSCI Emerging Markets Index.

The announcement was made as part of MSCI's annual market classification review and revealed after the close of U.S. markets.

What Happened

Argentina, South America's second-largest economy behind Brazil, and Saudi Arabia, the largest producer in the Organization of Petroleum Exporting Countries, were put on MSCI's list of countries that could earn the coveted emerging markets promotion at different times.

Several years ago, MSCI demoted Argentina to frontier markets status, but regime changes and efforts to improve local financial markets positioned the country for reentry to the MSCI Emerging Markets Index. MSCI denied Argentina the promotion last year. Saudi Arabia has been classified as a standalone market by MSCI.

“MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro-forma basis a weight of approximately 2.6 percent of the index with 32 securities, following a two‐step inclusion process,” said MSCI. “The first inclusion step will coincide with the May 2019 Semi‐Annual Index Review.

Why It's Important

The iShares MSCI Saudi Arabia ETF (NYSE:KSA), the only U.S.-listed ETF dedicated to Saudi stocks, entered Wednesday with a year-to-date gain of almost 21 percent, making it one of this year's best-performing single-country ETFs regardless of market classification.

Investors have been piling into the fund in anticipation of MSCI lifting the kingdom to emerging markets status. KSA had nearly $263 million in assets under management as of June 19, of which $231 million has flowed into the fund this year.

After surging last year in anticipation of a promotion from MSCI that did not materialize, the Global X MSCI Argentina ETF (NYSE:ARGT) is off more than 19 percent this year. ARGT is the largest Argentina ETF in the U.S. The South American country recently raised interest rates to 40 percent to stem declines in its currency, the peso.

What's Next

MSCI also said that it added Kuwait as a candidate for a possible emerging markets promotion following the 2019 marker classification. Kuwait, also an OPEC member, is the second-largest country weight in the iShares MSCI Frontier 100 ETF (NYSE:FM) at 19.32 percent.

Argentina is FM's largest country exposure at almost 19.6 percent.

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