MSCI has upgraded Argentina to its emerging markets indices to “emerging market” status after nine years of being classified as a frontier economy.
With regard to Argentina, MSCI stated that “international institutional investors expressed confidence in the country’s ability to maintain current equity market accessibility conditions, which is a key factor in MSCI’s classification framework.”
In light of the most recent events impacting Argentina’s foreign exchange situation, MSCI also clarifies that it may review its reclassification decision were the Argentine authorities to introduce any sort of market accessibility restrictions, such as capital or foreign exchange controls. It should be noted that in 2015, in a series of pro-investment policies, Argentina eliminated foreign exchange controls and import and export restrictions. Furthermore, the government also successfully reached an agreement to repay holdout creditors, which enabled Argentina to issue bonds again. Its first subsequent bond issue, in April 2016, was the largest emerging market sovereign issue to date at that time, raising $16 billion.
Prior to MSCI’s announcement, a number of institutional investors had shared their opinion regarding the investment environment in Argentina and the likelihood of MSCI’s decision. Alberto Bernal, chief strategist at XP Securities said that the government and key players in the local private financial sector have worked diligently to advance the goal of addressing the concerns that MSCI and others have. JPMorgan Chase & Co in its analysis also noted that it maintained a positive view on the decision even after market volatility. They further added that “the relevant conclusion after this stress test is that despite volatility, the policy response was orthodox and did not prevent free access to the markets.”
Argentine Index Included in MSCI Emerging Markets Index
The MSCI Argentina Index will be included in the MSCI Emerging Markets Index coinciding with the May 2019 Semi-Annual Index Review. As of now, MSCI will continue to limit the inclusion in the index to only foreign listings of Argentine companies, as the feedback from international institutional investors stated that higher liquidity across the domestic market is needed before considering a shift from offshore to onshore listings. MSCI will reevaluate this decision as liquidity conditions on the Buenos Aires Stock Exchange continue to improve.
MSCI will also launch the MSCI Argentina Provisional Index by September 1, 2018. This will serve to manage the implementation of the inclusion of Argentine stocks in investors’ portfolios on the schedule of their choosing. The list of provisional indexes to be launched will be communicated in the coming weeks. The list of constituents of the MSCI Argentina Index, using Emerging Markets Index thresholds have been made available on https://www.msci.com/market-classification.
US$ 3.8 Billion Capital Inflow Predicted
Being back on the MSCI Emerging Market list means that institutional investors that follow the benchmark and investment funds that mimic the portfolio will load back on Argentine securities. JPMorgan estimates that there is about $384bn of money that passively tracks MSCI’s emerging markets indices and the upgrade will lead to about $3.8 billion of inflow of capital into Argentina.
Morgan Stanley also predicted that Argentina benchmark equity index may set the stage for a 20 percent gain over next 4 months as a result of the upgrade by MSCI. The new classification would also allow Argentina to access cheaper capital and encourage further investment in infrastructure as a result.