The stock markets of the world's developing economies are about to undergo a kind of a revolution.
As index provider MSCI Inc. prepares to carry out its annual review in June, some of the world's biggest and best-performing equity markets – with assets totalling almost $9-trillion (U.S.) – are poised for reclassification.
Pakistan
Past: MSCI downgraded Pakistan from an emerging market to a frontier nation in 2009 after it imposed a floor on the stock index to curb excessive selling during the financial crisis. The market's size has since grown by about fivefold.
Present: The country trades as an emerging market starting Thursday. Investors expect it to have a 0.2-per-cent weighting in the MSCI emerging markets index, and get anywhere between $300-million to $550-million in inflows from tracker funds.
"It's going to be a small fish in a big pond," said Andrew Brudenell, a London-based money manager at Ashmore Group PLC.
Future: Pakistan's economy may grow about 5 per cent this year, according to Mattias Martinsson, the Stockholm-based chief investment officer at Tundra Fonder AB, which holds about $150-million in Pakistani stocks.
"You can see growth picking up, you can see companies starting to invest, signs of political maturity and terrorist activity continuing to decrease," he said. "When it starts to approach 6 per cent and 7 per cent growth, then suddenly you have a market that for so many people will look like the Philippines, will look like India even."
Saudi Arabia
Past: Two years after the kingdom opened its stock market to global investors, foreign ownership has languished at about 5 per cent and the equity index has lost about 30 per cent. The market's size fell by roughly $140-billion as the changes coincided with the government's austerity measures.
Present: As part of its plan to revamp the economy and reduce dependence on oil revenue, Saudi Arabia is now seeking inclusion in MSCI's emerging-market gauge. The country says its bourse has met all the criteria and there are now enough institutional investors to give the index provider feedback on the investment process.
Future: The country introduced short-selling and will probably add a range of sophisticated financial products. An initial public offering by state-run Saudi Aramco may provide the breakthrough the country has been looking for in terms of foreigners' interest.
South Korea
Past: The country won a reprieve last year when MSCI decided not to include China's domestic stocks in its emerging-market index, which would have reduced South Korea's 15-per-cent weighting in the gauge. Since then, the Kospi index has rallied at least 15 per cent, more than double the gains in Shanghai composite index.
Present: MSCI is considering whether to upgrade South Korea into a developed market. The country has a new president, ending a period of political tensions around the previous president's impeachment. Samsung Electronics is one of the biggest contributors to the MSCI gauge's increase this year.
Future: Mark Mobius, the executive chairman of Templeton Emerging Markets Group, said he's ignoring South Korea's tension with the North and is betting on President Moon Jae-in overhauling the conglomerate-dominated economy.
"This means that the so-called Korea discount narrows, and you have bigger opportunities for investing," he said.
China
Past: China's domestic equities were denied entry into MSCI Inc.'s benchmark indexes for a third year last June despite a flurry of measures to address the index compiler's concerns, including repatriation limits and excessive trading suspensions.
Present: MSCI is surveying stakeholders for the fourth time on the merits of including members of the country's $6.6-trillion equity market in its benchmark indexes. But China still has some way to go to win approval, said MSCI chief executive Henry Fernandez said on May 24.
Future: Only 169 mainland-listed companies will be considered for inclusion, down from 448 under a previous proposal, and all will be large-cap shares currently accessible to foreign investors through exchange links with Hong Kong. With MSCI scaling down the scope of its proposal, China is likely to get little more than a 0.5 per cent weighting, half of the previously suggested level.
The index provider will use the offshore yuan for its calculations rather than the onshore currency.
Argentina
Past: The free float of the peso in late 2015 has spurred a rally in Argentine stocks that has made them the world's best performers this year, after Venezuela. The Merval index is trading near a record both in terms of price and market capitalization.
Present: Shares of the country's stock exchange operator, Mercado de Valores de Buenos Aires, began trading on the public market in May as investors prepare for MSCI's June 20 decision. Inflows into a U.S. exchange-traded fund focusing on Argentina surged to a record in May.
Future: BlackRock Inc. and Morgan Stanley are among those favouring Argentine stocks because of its strengthening economy, lower inflation and a positive earnings outlook.