MSCI adds Argentina securities to emerging markets index

MSCI Inc., a major investment research firm and the world’s largest provider of indices, announced Monday that eight Argentine securities are set to join their emerging-market stock benchmarks, a step that could potentially draw millions of dollars of investor inflows.

MSCI, which announced the addition of Argentina last June, said the stocks will join its indices as of the close of trading on May 28. Argentina will account for 0.26 percent of the MSCI Emerging Markets index.

Argentina’s inclusion had been long awaited by investors, who saw last year’s returns wiped out by a peso rout that forced the government to seek a US$56-billion loan from the International Monetary Fund. More recently, the nation’s assets have been pummelled by investor anxiety over President Mauricio Macri’s chance of winning re-election in October.

Thirty equities from Saudi Arabia will also be added, giving the country a 1.42 percent weighting.

Twenty-six China A shares will be added to the MSCI China Index. China A shares will be left with a 1.76 percent weighting in the broad developing-nation gauge, it said. The China gauge will have 31 additions in total, including five that aren’t A shares.

Kuwait stocks, which had been on the firm’s watch list for a potential upgrade, weren’t included. The firm is still holding a consultation on the country and will probably announce the result at its annual review in June, according to Pavlo Taranenko, executive director of index research at MSCI. If it gets the upgrade, Kuwait would exit the frontier-market group in 2020, leaving current number two, Vietnam, to dominate the asset class.

MSCI’s emerging-markets index is the most important for the asset class, with as much as US$1.8 trillion in assets benchmarked to it as of June 2018. The stocks are being added at a time when developing-nation assets are in the midst of a sell-off tied to increased Sino-American trade tensions, with Chinese shares in particular in the firing line.

China Sell-Off

Foreigners are dumping mainland China-listed shares at a record pace. Already this month, 17.4 billion yuan (US$2.6 billion) of A shares have been sold through trading links with Hong Kong, putting May well on track to surpass the 18-billion-yuan outflow in April.

While Chinese stocks remain some of the best performing in the world this year, about US$1 trillion has been erased from the nation’s equity markets in just three weeks as the trade dispute reignited. On Monday, China announced it will increase tariffs imposed on about US$60 billion of US goods in retaliation for President Donald Trump’s latest escalation of the trade war.

The Shanghai Composite Index has fallen about 6 percent this month. It’s up more than 16 percent year-to-date.

MSCI will increase the inclusion factor of large-cap A shares to 10 percent from 5 percent, according to the statement, though that doesn’t guarantee a boost for the market: The initial inclusion of A shares last year did little to stop the worst rout in a decade. Inflows from index-tracking funds are minor compared to the size of China’s market, which is dominated by retail investors.

Recent volatility in Chinese shares won’t have an impact on MSCI’s plans to raise the weighting of large-caps this year, according to Zhen Wei, director of China research at MSCI Inc. However, it could mean a change in the number of mid-caps that are included in the November review, he said in an interview in Singapore on Thursday.

“If A shares underperform other emerging markets on relative terms, it will be reflected in market weight,” and vice versa, he said.

Saudi Arabia’s stocks have also suffered from geopolitical tensions, trimming gains fuelled by expectation for MSCI’s decision. The Tadawul All Share Index slumped 3.6 percent on Monday, the most since the killing of journalist Jamal Khashoggi in October.

-TIMES/BLOOMBERG