Global Investment Alert: Bad News for Greece, Morocco; Good News for Qatar and UAE

No immediate action is expected on China A-shares, with the company stating that “a large number of key obstacles in the areas of capital mobility, quota allocation and taxation continue to exist and substantial progress would need to be made in order to warrant an inclusion in the MSCI Emerging Markets Index.” “However, given the significant size of the China A-share market and the possibility of further regulatory reforms in the short term, MSCI believes that it is important to actively engage with the international investment community on this matter. The speed and magnitude of any hypothetical inclusion will be entirely dependent on the speed and magnitude of actual progress in the opening of the market and the resulting experience of international institutional investors,” according to MSCI.

Dimitris Melas, managing director of index research for MSCI, said that investors in developed markets will not see a significant change because of the Greek downgrade because “it already had such a tiny weight in the index that even for portfolios that replicate the MSCI index, the effect will be tiny.” Greece’s presence in the developed markets index amounted to about one basis point, and “removing that small allocation will not really register for most investors,” he said.

However, for advisors who look more at emerging markets, “the changes are likely to have a more noticeable impact,” Melas said. Greece’s very small weight in developed markets may not be noticeable in its absence, but in the emerging markets index, in which market cap tends to be lower, it will have a greater weight. “We are projecting that after the reclassification in November, Greece would probably have a weight of 0.3%—30 basis points—in emerging markets. That’s still small, tiny compared to China or Brazil, but it’s now beginning to be noticeable.”

The emerging markets index will also feel the effects of the addition of Qatar and the UAE, he said. Based on available data at the time of interview, he predicted that Qatar will have a weight of 0.45% and the UAE 0.4%. “In total, across the three, the total will be 1.2% weight,” said Melas. “This is now a noticeable, significant change for emerging market investors—those who follow the MSCI index will have a broader opportunity in addition to other countries classified today as emerging markets.”

Last but not least for advisors to remember is the effect on the frontier markets of the departure of Qatar and the UAE and the arrival of Morocco, “These changes will be noticeable,” Melas said.

The changes are announced well in advance of their taking effect, he said, not so much because of advisors who use ETFs and third-party vehicles, but more because of asset managers who invest directly. Such managers “may need to cover the market, set up custody arrangements, find local brokers, and so on. It’s not such a big issue for Greece, because it’s being downgraded to emerging, so it’s not too difficult for investors there. But for Qatar and the UAE, the process is to give a long lead time to make sure people are able to make necessary arrangements to invest in those markets.”