Greece became the first developed nation to be cut to emerging-market status by MSCI Inc. after the local stock index plunged 83 percent since 2007.
Greece failed to meet criteria regarding securities borrowing and lending facilities, short selling and transferability, said MSCI, whose equity indexes are tracked by investors with about $7 trillion in assets. Qatar and the United Arab Emirates were raised to emerging markets, while Morocco was cut to a frontier market. New York-based MSCI kept South Korea and Taiwan as emerging markets, and placed Chinese shares traded on local exchanges on review for inclusion in the emerging category, according to a statement yesterday.
The ASE Index fell 1.4 percent to 882.99 at 1:49 p.m. in Athens. The gauge has dropped 10 percent this week as Greece failed to win any bids in a sale of the country’s gas monopoly. The unsuccessful attempt to sell Depa SA dented Greece’s state-asset sales program, which underpins 240 billion euros ($318 billion) of bailout loans from the euro area and International Monetary Fund.
“It is unclear yet what the weight of the MSCI Greece will be on emerging markets, but in any case it will be significantly higher than that it has on developed markets,” Constantinos Zouzoulas, an analyst at Axia Ventures Group, a brokerage in Athens, wrote in a note. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term.”
Locked out of bond markets since April 2010, Greece accepted two European Union-led bailout packages as public opposition to pension and wage cuts derailed the pace of promised economic reforms. The ASE was the world’s second-worst performer since October 2007.
MSCI put Greece under review for downgrade in June 2012, saying restrictions on in-kind transfers, off-exchange transactions, stock lending and short-selling stopped the country from having a fully functional market. The probability of a demotion increased after Coca-Cola HBC AG, the soft-drink bottler that previously made up almost a quarter of the Athens Stock Exchange by weight, switched its primary listing to London in April.
The index provider upgraded Greece to developed-market status in 2001. The weight of Greek companies in the MSCI World Index has tumbled to 0.01 percent from 0.16 percent in May 2010, according to data compiled by Bloomberg.
“We’re already seeing money heading back to safe havens and the MSCI decision may exacerbate that,” Peter Sorrentino, who helps manage about $14.7 billion at Huntington Asset Advisors in Cincinnati, said in a phone interview. “Greece’s downgrade brings them back to the forefront and it’s a sign that the crisis in Europe is far from over.”
MSCI’s reclassification of Greece follows Russell Investments, which advises funds with $2.4 trillion in assets. Russell said in March it will downgrade Greece to an emerging from a developed market after it failed economic and operational-risk assessments.
The ASE has rallied 85 percent since June 5, 2012, as Greek Prime Minister Antonis Samaras’s New Democracy party formed a coalition government after finishing first in repeat elections and European Central Bank President Mario Draghi vowed to do whatever it takes to preserve the euro.
In Qatar, the MSCI upgrade could draw investment of more than $430 million while the U.A.E., which has bourses in Dubai and Abu Dhabi, sees flows of $370 million, HSBC Holdings Plc said in a report dated May 31. Qatar’s benchmark QE Index rallied 1.8 percent today, the most since August 2011.
“An upgrade will bring more investors into the equity markets,” Montasser Khelifi, a Dubai-based senior manager for global markets at Quantum Investment Bank Ltd., said in a telephone interview. “It’s a recognition that the business conditions and the legislations are good enough and suitable for investors.”
MSCI cited Qatar’s efforts to increase limits on foreign ownership in raising its classification for the $141 billion stock exchange.
The promotion of the U.A.E.’s $152 billion stock markets is helping extend two of the world’s top-five equity rallies this year. Abu Dhabi’s benchmark ADX General Index jumped 2.7 percent today, taking its 2013 advance to 39 percent, the fourth-best performing gauge globally among 94 tracked by Bloomberg. Dubai’s DFM General Index, the second-best performer this year with a 48 percent jump, rose 1.6 percent.
MSCI’s decision on upgrading Qatar and the U.A.E. “reflects a growing realization of how far these economies and their financial markets have developed in recent years,” Sam Vecht, who manages the $156 million BlackRock Frontiers Investment Trust, said in an e-mailed statement.
In Morocco, MSCI cited a failure to meet minimum liquidity levels for several years for its downgrade to a frontier market. The North African country, which was added to the MSCI Emerging Markets Index in 2001, currently has the smallest weighting on the measure. Morocco’s MADEX Free Float Index has fallen 7 percent this year and closed at the lowest since November 2006 yesterday. It was little changed today.
A shortage of foreign currency in Egypt may require a consultation with investors about excluding the country from the emerging-market index, MSCI said. The situation “could trigger a review of the MSCI Egypt Index for potential reclassification to frontier markets,” the index provider said. The EGX30 Index slid 4.1 percent to an 11-month low.
MSCI said positive regulatory development in China prompted the company to initiate a review of China A-shares for inclusion in the emerging-market index. The index provider cited an increase in quota limits for some foreign institutional investors, increases in caps on foreign ownership and a broader availability of financial products.
Shortcomings in capital mobility and a lack of clarity on tax rules are obstacles for China, MSCI said.
The limited convertibility of the South Korean won was a factor in holding the country back from developed status, according to MSCI. It will remain on review for an upgrade.
Taiwan’s market falls short of developed-nation classification because of market accessibility issues, including the lack of an offshore market for the currency, the index provider said.
“I don’t think anything has improved since the last review,” Pearlyn Wong, a Singapore-based investment analyst at Bank Julius Baer & Co., which oversees about $210 billion worldwide, said by phone on June 10.
Investor expectations for an upgrade had been low for South Korea because the market has underperformed among emerging markets, according to Heo Pil Seok, the Seoul-based chief executive officer at Midas International Asset Management Ltd., which oversees about $6.4 billion.
“Other emerging markets like Malaysia, Indonesia and Thailand have become more attractive to investors, with South Korea underperforming since 2009 when expectations for an upgrade was at its highest level,” he said by phone on June 10.
South Korea’s Kospi index has risen 39 percent in the four years to June 10, compared with gains of at least 65 percent for benchmark indexes in the three Southeast Asian nations. Taiwan’s Taiex Index has advanced 39 percent.
MSCI decided against including Israel in its Europe Index, a change that Ester Levanon, the Tel Aviv bourse’s chief executive officer, said would have lured more foreign capital.
Institutional investors consulted “are not supportive of an inclusion of the MSCI Israel Index” in the MSCI Europe Index, the index provider said. Levanon said June 6 the move to the MSCI Europe gauge would bring an additional flow of $1 billion to $2 billion.