(Updated with details throughout, including comments from an
MSCI official on Greece during a telephone news conference.)
South Korea and Taiwan, two countries that are part of huge ETFs
such as the Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO), will
retain their developing market status because they still lack
accessibility. But, as MSCI said a year ago, the two countries
remain under review for possible reclassification to developed
status a year from now.
In its announcement of its annual reclassification review, MSCI
also again said further consideration of whether Qatar and the
United Arab Emirates ought to be shifted to emerging market status
from their current frontier market status will be extended another
year. It noted, as it has previously, that it needs more time to
assess recent changes to those two markets.
Two new folds this year were that debt-gorged Greece was added
to MSCI's list of possible reclassification to an emerging markets
country from its current developed-market status, and that Morocco
has been added for potential consideration as a candidate for the
MSCI Frontier Markets Index. Both decisions will also be taken up a
year from now, MSCI said today in a press release.
MSCI's annual review is crucial to ETFs such as the $50 billion
VWO or its rival fund that uses the same benchmark, the $34 billion
iShares MSCI Emerging Markets Index Fund (NYSEArca:EEM). The annual
review could have resulted in Korea or Taiwan being dropped from
those ETFs, just as it could have meant Qatar and the UAE would
have joined them. As it stands, both MSCI's emerging and frontier
market indexes will remain unchanged for now, MSCI said.
MSCI stressed that that operational issues, mission-critical to
institutional investors, are behind its decisions, and that making
changes to the indexes before those operational shortcomings are
rectified would force investors to make case-by-case adjustments
they simply aren't expecting.
The company announces changes or potential changes every June,
and any changes it makes aren't implemented until the following
June. Its next classification review is in June 2013.
Deja Vu
The indexing company, widely considered the market leader in
international benchmarks, is subjecting the market to a bit of
'déjà vu all over again' as it relates to promoting Korea, Taiwan,
Qatar and the UAE. Indeed, the promotions for Korea, Qatar and the
UAE have been on the table for the past four years, and in the case
of Taiwan, for the past three.
In South Korea, perhaps the source of most the head-scratching
surrounding MSCI's ongoing decisions to not promote the hugely
successful Asian country to developed-market status, the firm said
the issues are a lack of currency convertibility and equity
settlement across multiple accounts.
Taiwan still suffers from market accessibility issues, the
company said.
Foreign ownership limits remain an ongoing issue in Qatar, and
in the UAE, most challenges that stand behind it and emerging
market status have been surmounted -- save for market accessibility
issues related to custody and clearing and settlement.
Greece Market Size Shrinking
It's hardly a surprise that all the turmoil in Greece has
cratered share prices in the southern European country. So MSCI
saying shrinking size and liquidity of were partly behind its
choice to consider reclassifying the country as an emerging market
seems logical.
In its press release, MSCI said that the weight of the MSCI
Greece Index in the MSCI World Index has fallen in the past two
years to 0.03 percent in May 2012 from 0.16 percent in May
2010.
The country is no longer in line with developed markets size
requirement, and has just two index constituents, the company said.
If those two constituents were to shrink much further, MSCI might
have to discontinue calculating the MSCI Greece Index, it said.
The decision about Greek status amounts to giving investors time
to seriously weigh salient issues, including a potential exit from
the eurozone, Dimitris Melas, an executive director at MSCI, said
in a press conference.
But Melas said that given sufficient cause, MSCI could easily go
off its carefully orchestrated script.
"It's worth highlighting that if Greece, or any other market,
were to suddenly impose capital controls, we may react immediately
outside of the review cycle," Melas said in response to a question
from IndexUniverse.
Morocco
Regarding Morocco, the indexing firm said the MSCI Morocco Index
is more in line with the size and liquidity requirements of
frontier markets.
That follows a significant decrease in liquidity since 2008,
which resulted in a simultaneous decrease in the number of
constituents in the MSCI Morocco Index, the company said.
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