MSCI Inc, the leading benchmark index provider, warned Argentina on Tuesday that it could be removed from MSCI's Emerging Markets Index should it become harder for foreign investors to access its stock market.
Concern about market accessibility in Argentina prompted MSCI to flag the country during the company's 2020 rating review. Turkey was also warned.
“While volatility increased dramatically due to the Covid-19 pandemic, global equity markets remained accessible and continued to function well, allowing issuers to raise capital and investors to manage risk during the crisis,” said MSCI Index Policy Committee Chairman Dimitris Melas.
“In the last 12 months, two important Emerging Markets, Argentina and Turkey, suffered substantial deterioration in market accessibility that could lead to their exclusion from the MSCI Emerging Markets Index,” he said in a statement.
MSCI said it would continue consulting with "market participants" on the classification. International investors continue to be subject to stringent capital controls which were put in place in September 2019, which made it impossible for them to gain access to the domestic equity market.
Argentine stocks remain the benchmark for the developing world for now, but prolonged or tighter capital controls could trigger foreclosure if they start to infringe investor access, MSCI said. So far, access has not been limited to the five stocks tracked by the MSCI Argentina index, as they are all listed abroad, according to the firm.
“The MSCI Argentina Indexes remain replicable, as only foreign listings are currently eligible for index inclusion, but the imposition of the current capital controls is not in line with the market accessibility criteria of the MSCI Emerging Markets Indexes,” said Sebastien Lieblich, the chairman of MSCI's Equity Index Committee.
“The Argentine authorities must realise that the prolonged application of capital controls or the introduction of further capital controls may force the reclassification of the MSCI Argentina Indexes from Emerging Markets status to either Frontier Markets or Standalone Markets status,” Lieblich warned.
Shares in the MSCI Turkey Index will also be analysed for reclassification to frontier or independent market status in the coming months if bans on short selling and the lending of shares affect accessibility, the company said.