South Korea, Taiwan, the United Arab Emirates and Qatar failed to secure an upgrade at MSCI Inc., whose stock indexes are tracked by investors with about $7 trillion in assets.
The New York-based index provider will keep South Korea and Taiwan’s emerging-market status, and Qatar and the U.A.E.’s frontier classification, it said in a statement yesterday. The two Asian countries will be kept under review for potential elevation to developed markets, while the Persian Gulf nations will remain under review for possible reclassification to emerging markets, it said.
MSCI tracks economic development, trading volumes and market accessibility to assess market classifications. Upgrades could lead to the nations’ equities luring more of the investor assets that follow MSCI’s gauges. Winning developed status could draw a net $8.3 billion to South Korea and $5.2 billion to Taiwan, HSBC Holdings Plc analysts led by Tom Zhou wrote in a June 18 report.
“Expectations were quite low, and we didn’t see much positions built targeted for any potential change,” said Chung Yun Sik, the Seoul-based chief investment officer for equities at ING Investment Management Korea Ltd., which oversees about $16 billion. “Developments in Europe’s ongoing debt crisis will have a bigger sway.”
South Korea, the U.A.E. and Qatar were under evaluation for a fourth year for a possible upgrade, while Taiwan was reviewed for a third year. South Korea’s $1 trillion stock market is the largest of the four, according to data compiled by Bloomberg. Equities in Taiwan are valued at $746 billion, compared with Qatar’s $123 billion and the U.A.E.’s $100 billion.
Greece will be reviewed for possible reclassification to emerging market from developed and Morocco to frontier from emerging, MSCI said.
MSCI cited the absence of offshore currency markets for bypassing South Korea and Taiwan for upgrades. For South Korea, MSCI also cited limitations in equity settlement across multiple accounts. The nation is already classified as a developed market by FTSE Group, a rival index compiler.
South Korea represents about 15 percent of the $6.8 trillion MSCI Emerging Markets Index, according to HSBC’s report. Taiwan accounted for 11 percent, the report showed. South Korea’s Kospi index and Taiwan’s Taiex Index both fell 0.8 percent at the close today. MSCI’s gauge of developing nations lost 1 percent at 11:44 a.m. in London.
The index compiler’s decision won’t have a “big” impact on markets given the “solid fundamentals” of the South Korean economy and corporate earnings, Korea Exchange Inc. said in an e-mailed statement today. Michael Lin, a spokesman for the Taiwan Stock Exchange, didn’t not return two calls to his mobile.
MSCI said the only remaining issue preventing the reclassification of Qatar to emerging markets is “very low” foreign ownership limits. Michael Prest, a spokesman for the Qatar Financial Centre, declined to comment.
Most companies in Qatar cap 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.
“The MSCI UAE Index meets all requirements besides specific market accessibility issues related to custody and clearing and settlement,” MSCI said in the statement.
Essam Abdul Hadi, a spokesman for the U.A.E. Securities and Commodities Authority, didn’t answer a phone call made to his mobile. Delivery-versus-payment, started in the U.A.E. last year, is a securities industry procedure in which payment for a security must be made when the security is delivered. It was cited last year as a reason for not upgrading the market.
Trading volumes in stock markets in South Korea, Taiwan and the Persian Gulf are declining as investors trimmed holdings of risky assets amid Europe’s deepening debt crisis. Average daily volumes in South Korea and Taiwan were at least 20 percent lower this month through June 19 than the average for the year, according to data compiled by Bloomberg. Dubai’s volumes tumbled to an average 96 million shares in the past month after reaching 835 million on March 5.
“A lot of market participants are citing the existing global challenges and the euro zone crisis as possible culprits, however, MSCI has been clear in providing the needed changes to facilitate the ascension process” for Qatar and the U.A.E., Salah Shamma, portfolio manager at Franklin Templeton Investments (ME) Ltd. said by e-mail. “MSCI EM inclusion for either country would most certainly expand the existing investor pool and create a dedicated investor base that is crucial to the long-term development of the market.”
Dubai’s DFM General Index fell 0.4 percent today and has advanced 8.6 percent so far this year, while Abu Dhabi’s ADX General Index has risen 4.4 percent and Qatar’s QE Index dropped 6 percent. South Korea’s Kospi gained 3.5 percent so far this year, while Taiwan’s Taiex added 2.9 percent.
Frontier markets typically have less-developed economies and financial markets than emerging markets and have more restrictions on foreign stock ownership.