The U.S.-China trade war has taken much of the wind out of the sails for emerging markets this year, but there is some positive news on the horizon.
FTSE Russell, one of the major index developers, has just upgraded several emerging market countries as part of its annual country reclassification of global equity and fixed income indexes. The changes will take effect a year from now.
Romania is reclassified a Secondary Emerging Market — an upgrade from Frontier — and Tanzania, currently unclassified, is classified as a Frontier Market. Vietnam remains on FTSE Russell’s Watch List for possible reclassification from Frontier to Secondary Emerging Market.
Argentina, however, was downgraded in the latest index update, removed from the Watch List for possible reclassification to Secondary Emerging market status due to the imposition of capital controls. In an effort to support a steep slide in the Argentine peso, the country’s central bank announced restrictions on foreign currency transactions, requiring companies and banks to purchase hard currency and the country’s exporters to repatriate all hard currency from sales abroad. Individual Argentines are now limited to purchasing $10,000 worth of U.S. dollars per month while nonresidents are restricted to $1,000 a month, and they’re not allowed to make bank transfers abroad.
Despite the continuing U.S.-China trade dispute, FTSE Russell as well as MSCI continue to phase in the inclusion of China A shares, which trade on the mainland on the Shanghai and Shenzhen indexes, in their emerging market indexes.
As of September 23, FTSE Russell completed the second of three tranches that will ultimately result in roughly 5.5% weighting of China A shares in its FTSE Emerging market index, whose full implementation is expected to be completed in March 2020.
FTSE Russell also announced that it continues to consider China’s local currency bond market for a potential upgrade to the Market Accessibility Level 2, which is required for inclusion in the WGBI.
A local currency government debt market must have a value of 2 to satisfy the accessibility criteria for the FTSE World Government Bond Index (WGBI).
“China will remain on the Watch List for potential upgrade to Market Accessibility Level 2 based on feedback from index users that the Chinese government bond market continues to make demonstrable progress towards meeting the criteria for the highest accessibility level,” according to FTSE Russell.
Malaysia, which has already attained Market Accessibility Level 2, may lose that rating. The country remains on FTSE Russell’s Watch List for potential downgrade from its current Market Accessibility as it continues to analyze the practical impact of recent initiatives announced by Bank Negara Malaysia to improve market liquidity and accessibility.
Israel, which was assigned the Level 2 accessibility rating last March, continues to meet minimums for its market size and credit rating to be included in the WGBI index as of April 1, 2020, according to FTSE Russell. At that point, it is expected to comprise 0.29% of the index based on 13 bonds with $68.2 billion in market value.
— Check out ‘We Remain Contrarian Bullish’: Merrill Strategist on ThinkAdvisor.