What is the MSCI and why should investors in the Kingdom care about it? Frank Kane has the answers.
Q: What is the MSCI Emerging Market Index?
A: It is a set of companies quoted on stock markets deemed to be fast-growing and increasingly sophisticated, like the “developed” markets of Europe and North America. The index was formerly run by US investment bank Morgan Stanley, hence the “MS,” while the “CI” stands for Capital International. Markets are weighted according to size and other criteria, aiming to give international investors exposure to high-growth markets. MSCI is based on Wall Street, New York. MSCI compiles other indices too, like the world and frontier indices, as well as standalone country indices, where Saudi Arabia is currently located, pending upgrade to the full emerging market (EM) index. In total, MSCI indices represent a global value of $1.5 trillion.
Q: What does a country have to do to get included?
A: It has to demonstrate that its stock market reaches the international standards set by the compiler, in terms of access to global investors, transparency, efficiency, regulation and settlement. MSCI monitors the conditions in individual markets on a regular basis and can change its selection annually in a classification review.
Q: What does it mean to be on the “watchlist”?
A: It means that that particular country is being considered for imminent inclusion to the EM index, usually within two or three years of being placed on watch. However, it can be upgraded more quickly than that. Saudi Arabia is hoping to be put on the full emerging index by 2018 but that may slip into 2019. Over the next year, MSCI will be watching the performance of Saudi markets, as well as consulting international investors about their satisfaction with the Kingdom’s market performance, before making a decision on full inclusion.
Q: What other countries are in it?
A: There were 10 countries originally on the index when it was first compiled in 1988, and now there are 24, including some of the biggest economies in the world like China (added this week), India, Brazil, Mexico and Russia. In the Middle East, the UAE and Qatar have been on the index since 2014. Turkey is also included.
Q: How does inclusion affect share prices?
A: By giving global investors access to the stock market in a particular country, inclusion in the index is generally thought to be good for share prices. Share prices will often surge on the news that a country could be included, as happened with Tadawul-listed stocks on Wednesday. The markets in Dubai, Abu Dhabi and Doha also rose when they were included. However, inclusion also exposes the country to the full volatility of global market conditions, as happened during the global financial crisis in 2008 and the period in early 2016 when oil and commodity prices slumped dramatically. Emerging markets soared at the beginning of the century, but have had a tougher time since the global financial crisis.
Q: Will Tadawul shares automatically rise as a result of inclusion?
A: No, not automatically. They will remain subject to the normal process of investor appreciation. Global investors buy shares on fundamentals, like their profits record, the growth prospects in their sector, the quality of their executive team and their governance record on matters such as transparency and governance. The usual caveat — that shares can go down as well as up — applies to emerging markets just as much as developed ones.
Q: Who buys shares as a result of inclusion?
A: Global investors are generally classified into two groups — active and passive investors. The former identify specific stocks, sectors or geographies as the basis for their investment decision. They may be more willing to include a stock as a result of it being on the MSCI emerging market index. But the biggest incentive for investment is generally believed to come from passive investors, who buy the index as opposed to individual stocks, often through the mechanism of exchange traded funds (ETFs), a marketable security that tracks a specific asset class. Passive investors will often include a country in their portfolio simply because it is included in the EM index.
Q: Can a country be denied entry to the index?
A: Indeed it can. China was on the “watch” list for many years before it was admitted yesterday. MSCI also put on “hold” its consideration of whether Argentina should be upgraded from “frontier” to EM status, explaining that it needed another year to assess whether recent measures to improve the Buenos Aires market’s accessibility would be successful. It also announced that it was considering whether to drop Nigeria from frontier status.

Source: Arab News