Peru Ratified as Emerging Market as MSCI Frontier Risk Fades

  • Change may have spurred billions of dollars of outflows
  • Index provider says Peru still at risk of becoming frontier

MSCI Inc. ratified Peru’s status as an emerging market for equities, 10 months after rattling investors by warning that the country could be downgraded to frontier status.

Peru will remain in the company’s emerging-market index, MSCI, whose indexes are used to benchmark more than $10 billion in assets, said in a statement on its website. It added the Andean country could be reclassified as frontier if the number of Peruvian stocks meeting its liquidity criteria falls from the current three.

The decision is a boon to Peru, allowing it to keep investors who might otherwise have to sell because of limits on the kinds of stocks in which they can invest. Funds with about $1.7 trillion in assets track MSCI’s emerging-market index, compared with just $26 billion for the frontier gauge. The government had prioritized retaining the designation, with lawmakers waiving a tax on stock gains in an effort to boost trading volumes. The effort coincided with a pick-up in investor sentiment after Peruvians shunned a candidate viewed as unfriendly to investors in the country’s presidential race.

“Market sentiment has changed, producing a notable increase in trading,” said Marco Contreras, a senior analyst at Kallpa Securities SAB in Lima. “We’re going to have a government viewed by the market and the international community as very market friendly, unlike the existing one, which is going to bring more investment flows to Peru.”

Peru’s benchmark stock index has surged 41 percent his year in dollar terms, the best performance globally among more than 90 equity indexes tracked by Bloomberg. That represents a turnaround from 2015, when it lost 42 percent amid a rout in the mining companies that represent a quarter of the S&P/BVL Peru General Index.

Four straight years of declining trading volumes left Peru with the bare minimum of three stocks meeting MSCI’s liquidity requirements for emerging markets. Peru’s reclassification as a frontier market would have lead to billions of dollars of outflows, according to Lima Stock Exchange Chairman Christian Laub.

“The three names we have -- Buenaventura, Credicorp, Southern Copper -- are very solid but we need more,” he said by phone from Lima. “While we’re staying as an emerging market, we’re on the edge so we have a lot of work ahead of us to keep accelerating reforms.”

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