MSCI Seen Overlooking Taiwan With U.A.E. Staying Frontier

For the third straight year, South Korea, Taiwan, the United Arab Emirates and Qatar will all be passed over by MSCI Inc. for upgrades in market classifications, according to Citigroup Inc.

South Korea and Taiwan haven’t addressed concerns such as creating offshore currency markets that excluded the two emerging markets from being given developed status last year, HSBC Holdings Plc analysts led by Tom Zhou wrote in a June 18 report. Eight of the top 10 brokerages in the U.A.E., a frontier market under review along with Qatar to be listed as developing markets, said the nation would be bypassed. MSCI, whose gauges are tracked by investors managing $7 trillion, is scheduled to announce results of its latest review at 10 p.m. London time.

“The most likely scenario is that once again we don’t have any change and no markets get moved,” Andrew Howell, a London-based strategist for emerging and frontier markets at Citigroup, said in a phone interview on June 18. “There is a perception that for some of the main issues highlighted by MSCI preventing them from being re-classified, not enough is happening to get that process going.”

MSCI, a New York-based index provider, tracks economic development, trading volumes and market accessibility to assess market classifications. Upgrades could lead to the nation’s equities luring more of the investor assets that track MSCI’s gauges. Winning developed status would draw a net $8.3 billion to South Korea and $5.2 billion to Taiwan, the HSBC analysts wrote in their report.

Frontier Markets

Deborah Yang, a Hong Kong-based executive director at MSCI, didn’t immediately return a voice message left at her office seeking comment on the decision.

South Korea, which is being reviewed by MSCI for a fourth year, represents about 15 percent of the $6.87 trillion MSCI Emerging Markets Index, the second-largest weighting after China, according to HSBC’s report. Brazil followed with 14 percent and Taiwan, under review for a third year, with 11 percent, the report showed. The developing nations’ index advanced 3 percent this year to yesterday, while the MSCI World Index of developed markets, which is worth $27 trillion, has risen 3.8 percent. The $354.6 billion MSCI Frontier Markets Index is down 4.8 percent in the period.

South Korea won developed status from FTSE Group in September 2009. It’s the only country classified as developed by FTSE while remaining an emerging market in MSCI indexes, according to the companies’ websites.

MSCI knocked the nation and Taiwan back for upgrades last year, citing their non-existent offshore currency markets, among other reasons. For South Korea, MSCI also cited “anti-competitive” practices in relation to stock-market data and mandatory foreign investor registration, which required a “significant amount” of supporting documentation.

No Improvement

“We have not seen any major improvements in market accessibility in either Korea or Taiwan,” the HSBC analysts wrote. “We regard the upgrade of Korea or Taiwan to developed market status as unlikely.”

Cho Byung In, a spokesman for Korea Exchange Inc., declined to comment on the possibility of an upgrade. Two South Korean finance ministry officials, who can’t be identified because they aren’t authorized to speak on the topic, declined to comment. Lee Chi-Hsien, director general for securities and futures at Taiwan’s Financial Supervisory Commission, didn’t return three calls to his office.

“We won’t be shocked if they kept us at the emerging-market rating,” said Michael Lin, a Taiwan Stock Exchange spokesman. “We haven’t changed much in our practice the last year. The global financial situation hasn’t been very stable and we are spending more time dealing with that.”

Investor Withdrawals

Winning a higher classification doesn’t guarantee overseas fund inflows. Adjustments to stock holdings that followed Israel’s upgrade to developed status from emerging in May 2010 prompted investors to withdraw a net $795 million from the nation’s shares by the end of that year, compared with 2009 inflows of $1.7 billion, central bank data show.

Eight of the U.A.E.’s top 10 brokerages on the Dubai Financial Market said the nation would remain as a frontier market, while two said the elevation to an emerging status will happen.

The relative openness of the U.A.E.’s stock markets may mean the country could secure the upgrade while Qatar remains a frontier market, said Kifah Maharmeh, managing director at Al Dar Shares and Bonds, the ninth-biggest brokerage by trading values on the DFM. “The U.A.E. markets comply with all required rules and regulations, despite foreign ownership limits,” Maharmeh said. “The liquidity is on the sidelines, we just need a catalyst for it to come back in.”

DVP Model

EFG-Hermes Brokerage UAE LLC and Daman Securities predicted Qatar would most likely fail to make the promotion. Both countries are up for review for the fourth year.

MSCI said in December it would maintain the frontier status for the two Persian Gulf countries, citing investors’ concern over the effectiveness of the so-called delivery-versus-payment model, a program for completing stock transactions, and Qatar’s failure to announce plans to relax its foreign ownership laws.

Frontier markets typically have less-developed economies and financial markets than emerging markets, and have more restrictions on foreign stock ownership. Equities in the U.A.E. are valued at about $99 billion, while Qatar’s are worth about $122 billion, according to data compiled by Bloomberg.

Problems with the DVP and low trading volumes may mean the U.A.E. will remain a frontier market, and Qatar “doesn’t stand a chance” for an upgrade, according to Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder Investment Management Ltd.

Volume Plunge

“The DVP system they are trying to implement remains at early stages and the market has been quite illiquid for the past 12 months, which will dampen any appetite for an upgrade,” Sidani said in a June 18 e-mail.

Trading volumes among stock markets in South Korea, Taiwan and the Persian Gulf are declining as investors trim holdings of riskier assets amid Europe’s debt crisis. Average daily trading volumes in South Korea and Taiwan were at least 20 percent lower this month through yesterday than the average for the year, according to data compiled by Bloomberg.

Dubai’s volumes tumbled to an average 95 million shares in the past month after reaching 835 million on March 5. Qatar caps overseas ownership at 25 percent and the exchange’s acting chairman, Hussein al-Abdullah, said in a December interview in Abu Dhabi that he doesn’t expect the limits in companies to be increased in 2012. Under U.A.E. law, foreign companies must have U.A.E. nationals as their sponsors and are limited to a maximum 49 percent ownership of businesses, except in free zones.

Dubai’s DFM General Index has advanced 9.1 percent this year, while Abu Dhabi’s ADX General Index rose 3.6 percent. Dubai’s benchmark today fell 0.2 percent on bets the nation will fail to secure the upgrade. Qatar’s QE Index is down 5.4 percent in 2012. South Korea’s Kospi Index gained 3.6 percent so far this year through yesterday, while Taiwan’s Taiex Index added 2.8 percent in the period.

Michael Prest, a spokesman for the Qatar Financial Centre, declined to comment. Essam Abdul Hadi, a spokesman for the U.A.E. Securities and Commodities Authority, and Rashed Al-Baloushi, the chief executive officer of the Abu Dhabi Securities Exchange, did not answer two phone calls made to their mobile phones.

“The vast majority of investors expect no change for the U.A.E. and Qatar, so we expect very little market reaction if both are refused entry again,” said Julian Bruce, the Dubai-based director of institutional sales trading at EFG-Hermes Holding.

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