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Factbox: China, Argentina, Nigeria decisions loom for MSCI's index review
June 20, 2017 / 8:05 AM / 2 months ago

Factbox: China, Argentina, Nigeria decisions loom for MSCI's index review

FILE PHOTO: A man looks at an electronic board at a brokerage house in Shanghai August 31, 2009.Aly Song/File Photo

LONDON (Reuters) - Index provider MSCI is likely to open its emerging market benchmark to Chinese mainland-listed shares at its review on Tuesday, but investors are also expecting news on other markets such as Argentina and Saudi Arabia.

MSCI will announce the results of its review on June 20 around 2130 GMT. It will hold conference calls with journalists at 2300 GMT and again at 0700 GMT on June 21.

Following is a list of markets that could be subject to re-classification by MSCI:

CHINA

MSCI has rejected China's mainland-listed stocks - so-called A-shares - from inclusion in its main emerging markets index on three occasions, but they are expected to get the nod this time.

MSCI is looking to include 169 A-shares in its $1.5 trillion emerging markets index and by default its $37 trillion All-Country World Index. It trimmed the number of stocks from an original list of 448. The 169 stocks make up 5 percent of all listed mainland China companies.

If successful, the stocks would officially join in a year's time with a combined weighting of 0.5 percent.

MSCI already includes some Chinese shares, but only those listed in Hong Kong or the United States. They account for roughly 28 percent of the EM index. The new A-shares would be on top of that.

Royal Bank of Canada calculates that a 0.5 percent weighting for A-shares would imply $18.7 billion of buying between now and June 2018 as index-tracking funds adjust their portfolios to reflect the changes.

This would represent 0.3 percent of Chinese A-share market capitalisation, RBC said.

The A-share market (Shanghai and Shenzhen markets combined) is worth roughly $7.5 trillion at current valuations, the largest in the world after the main New York Stock Exchange and Nasdaq markets. Goldman Sachs estimates it is also the second largest in trading volumes at $67 billion year-to-date.

Goldman reckons retail investors own over 50 percent of A-share-listed market capitalisation and foreign investors own 1.4 percent.

The top country weightings, once A-shares are added, would be China at 28.6 percent, South Korea at 14.2 percent, Taiwan at 11.9 percent, India at 8.5 percent and Brazil at 8 percent.

RBC calculations show South Korea's weight dipping from almost 15 percent, implying $12.1 billion in selling. Taiwan might see $6.3 billion in equity selling.

NIGERIA

Nigeria is under review for possible demotion from MSCI's frontier markets index to 'standalone' status. That stems from "continuous deterioration of the market accessibility" after the introduction of restrictions on foreign currency trading in the first half of 2015.

Eleven Lagos-listed stocks are currently in the MSCI Frontier Markets 100 index with a weighting of around 7 percent. That is the fourth largest after Kuwait, Argentina and Vietnam.

Investors are hoping the recent introduction of a new foreign exchange mechanism, aimed at international portfolio investors, will earn the country a reprieve. Nigeria's index hit two-year highs last week.

ARGENTINA

MSCI is proposing to return nine Argentine stocks to its emerging markets index, eight years after it ejected the country because it imposed capital controls.

With stocks in Argentina up over 40 percent on a dollar basis year-to-date, market consensus seems to be expecting an upgrade. The MSCI Argentina Index would have nine constituents under "emerging markets", compared with fourteen under "frontier markets".

Argentina's emerging market weighting in event of an upgrade would be 0.4 percent, roughly comparable to Latin American peers Colombia and Peru but smaller than most Asian members in the index with the exception of Pakistan bit.ly/2rQdwwF

The key positive action since MSCI's review last year has been the removal of a rule that allowed only limited selling of a security for 120 days after its purchase.

SAUDI ARABIA

There is no official decision pending this time on Saudi Arabia, but the possibility of adding it to EM index has been bubbling in the background for a while.

In April, Saudi moved to a more favourable settlement cycle for institutional investors, something which had been identified as the last major impediment for official watch-list inclusion.

If added to the watch list, Saudi Arabia could be reviewed in a year's time for formal inclusion, which would take place one year later.

Acadian Asset Management estimates Saudi Arabia might end up with a 2 to 3 percent weighting in the EM index or up to 5 percent if it goes ahead with plans to float state oil giant Saudi Aramco.

Compiled by Marc Jones and Karin Strohecker, editing by Larry King

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