Bloomberg News

MSCI Delays Raising U.A.E., Qatar to Emerging Market Status

June 22, 2011

(Closes prices from fifth paragraph.)

June 22 (Bloomberg) -- MSCI Inc., whose stock indexes are tracked by investors with about $3 trillion in assets, delayed until December its decision on whether to raise the United Arab Emirates and Qatar to emerging-market status.

South Korea and Taiwan failed to win the developed-market designation from MSCI, which currently considers them emerging markets, according to a statement yesterday. The two countries, Asia’s biggest developing stock markets after China and India, will be evaluated again for a shift in 2012.

Introduction of delivery-versus-payment, a program for completing stock transactions, may help lift U.A.E. and Qatar from their frontier-market rankings. MSCI’s delay of the decision will allow more time for investors to assess the impact of the changes, the New York-based index provider said.

“The new system has been implemented; however, the MSCI criteria include a period of market participant assessment and feedback,” said Remy Briand, the global head of index research at MSCI Inc. “That’s really why we have this extension of the review: In order for various institutional investors to actually experience their trades and settlement through the new system over a period of time. We will review and get feedback over the next few months.”

Emerging-Market Index

Dubai’s DFM General Index retreated 1.8 percent, the most since May 23, at the 2 p.m. close in the emirate. Abu Dhabi’s ADX General Index and Qatar’s QE Index were little changed.

“The market reaction in the U.A.E. is showing exactly how little anybody had positioned for this; nobody had put on huge trades, hence the lack of a big reaction,” said Ibrahim Masood, who helps manage about $400 million at Mashreqbank PSC.

Equities in U.A.E. are valued at about $110 billion, while Qatar’s are worth about $121 billion, according to data compiled by Bloomberg. Qatar’s QE Index has fallen 5.3 percent this year. Stocks from South Korea and Taiwan are included in the $7.89 trillion MSCI Emerging Market Index, which lost 3.3 percent this year through yesterday.

An upgrade of the U.A.E. and Qatar is likely to draw more investors as fund managers buy their shares to mirror MSCI’s indexes. Israel’s benchmark TA-25 Index has surged 64 percent in dollar terms since MSCI announced the country’s promotion to developed-market status on June 16, 2009, compared with a 36 percent gain for the MSCI World Index.

Foreign Ownership Limits

MSCI in its statement cited “stringent foreign ownership limits” such as limited availability of shares to foreign investors as remaining concerns for the countries. “This point has been more strongly voiced for the Qatari market,” the index provider said.

Under existing U.A.E. law, foreign companies must have nationals as their sponsors and are limited to a maximum 49 percent ownership of businesses, except in free zones. Qatar caps overseas ownership at 25 percent.

“Qatar needs to do something on the foreign ownership limits; that much is clear,” Masood said. Qatar’s bourse today said the country will continue to improve market infrastructure and that the MSCI decision is “irrelevant” to the Persian Gulf country’s economic strength.

“This is a good outcome for the U.A.E. and Qatar as the MSCI has been clear and transparent in its decision,” Arindam Das, regional head at HSBC Securities Services, a unit of HSBC Holdings Plc, said in an e-mailed statement. “It has also differentiated between the two markets so that both are clear on the action needed before they can be included.”

So-called frontier markets typically have less-developed economies and financial markets than emerging markets, and have more restrictions on foreign stock ownership.

South Korea, Taiwan

South Korea and Taiwan weren’t upgraded amid issues including the lack of full currency convertibility and “rigidity” of the countries’ investor identification systems, MSCI said. Korea also has “anti-competitive” practices relating to stock market data, MSCI said.

MSCI is requesting that South Korea scrap a rule that the index compiler seek approval from Korea Exchange Inc. in order to list futures and options overseas based on the MSCI Korea Index, Lee Joo Hwan, head of the market data team at Korea Exchange Inc., said by phone today.

The bourse continues to believe that’s an irrelevant issue for upgrading the nation to developed status, Kong Do Hyun, an exchange spokesman, said by phone separately. The bourse will continue consultations with MSCI, he added.

“Both sides are trying to understand each other’s position, but we haven’t reached an agreement yet,” Chin Ping Chia, Hong Kong-based head of research for MSCI in Asia, said in a phone interview.

Kospi, Taiex

The index provider’s decision yesterday means South Korea and Taiwan, the world’s 13th- and 14th biggest stock markets, will lose out on purchases by investors who are restricted to developed-nation equities because of their perceived lower risk. South Korea was already assigned “developed” status by FTSE Group, a rival index compiler, in September 2009.

“It won’t be a drag on the Korean market as expectations weren’t too high this time,” Han Sang Soo, a fund manager at Samsung Asset Management Co. in Seoul, which oversees about $30 billion in assets. “Still, I think it’s only a matter of time until the promotion takes place because many of the market’s characteristics are already meeting the advanced standards.”

European Crisis

South Korea’s benchmark Kospi Index rose 0.8 percent in Seoul. Taiwan’s Taiex Index added 0.3 percent.

“We are not surprised by the outcome but it doesn’t mean we don’t care,” Michael Lin, spokesman for the Taiwan Stock Exchange, said today by phone. “We have been having discussions with investors and are constantly trying to improve areas where they deem it’s inconvenient for them.”

MSCI said the sovereign-debt crisis that has infected European economies such as Greece, Ireland and Portugal hasn’t affected the accessibility and investability of those equity markets, and no changes are currently being considered to the market classification status of their country indexes.

Standard & Poor’s on June 13 cut Greece by three levels to CCC, the world’s lowest debt grade. Ireland and Portugal also sought emergency loans in the past year.

--With assistance from Stefania Bianchi in Dubai and Weiyi Lim in Singapore. Editors: Darren Boey, Claudia Maedler

To contact the reporters on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Zahra Hankir in Dubai at zhankir@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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