It is defined if Argentina continues to be an emerging market or collapses: what does it mean to be a frontier economy

On June 10, investment index company MSCI published its Global Accessibility Review for 2021, in which the conditions for accessibility of 83 stock exchanges around the world. But Argentina was not included in this analysis: Since the imposition of exchange controls in September 2019, their status is being revised. Instead, the decision for this particular market has been postponed until next Thursday.

“The information for this market will be available on June 24, 2021, at the same time as the announcement of the annual review of the MSCI 2021 market classification. As a reminder, the MSCI Argentina indices are under classification due to capital controls that have been put in place. in September 2019, the company said in a statement released on June 10.

MSCI Argentina indices are being rated due to capital controls introduced in September 2019

So local investors will be watching this week for signs of what the market is expecting for the future of the Argentinian category. Paradoxically, however, many investors can put pressure on the result to be down.

To understand why the preferences of local investors, it is then necessary to review What you are at stake.

What are MSCI indices?

They are made up of a series of benchmarks which, taken as a whole, reflect in a representative way the evolution of the most important markets of the world: the United States, Japan, Europe or, directly, the world market. , among many others.

The selection of papers that make up each of these indices is carried out by analyzing large companies but also medium and small caps. In general, the assets that form part of it are characterized by their ease of negotiation and high liquidity on a global scale.

The selection of papers that make up each of these indices is carried out by analyzing large companies but also medium and small caps.

Thus, each index measures more or less faithfully the evolution of the market it represents. They are reviewed quarterly and, twice a year, the composition is rebalanced. For example, a stock can become more representative in an index portfolio. Or you can add or subtract a company the market.

The market uses them as indicators, they allow the performance of a market and investors to measure their performance against these markets, and as an investment instrument. There are “passive” funds in which no manager decides on strategies, they simply copy the composition of an index and the result obtained by those who invest in them is nothing more than the fate of that index.

For example, a stock that is part of one of these indices immediately benefits from the effect of passive fund purchases that due to their own commitments to investors, they must load into their portfolios a number of shares of this recently included company.

What are the Emerging and Border indices?

Argentina is currently included in the MSCI Emerging Markets Index and may be downgraded to the MSCI Frontier Markets Index. These are two emerging market indices, although the ones included in the first are the ones that offer the best and most favorable conditions for investors. More than anything, because of the size and liquidity – the size of a market and the number of trades it records – and accessibility, which makes the rules that weigh on a market, for example the pitfalls. foreign exchange.

Among the various selection criteria to decide which emerging markets and which are frontiers, it is these criteria that weigh the most. Particularly in Argentina, what is questionable is accessibility. This criterion includes concepts such as openness to foreign ownership, ease of entry and exit of capital, availability of investment instruments and stability of the institutional framework, among others.

In Argentina, what is questionable is accessibility. This criterion includes concepts such as openness to foreign ownership, ease of entry and exit of capital.

Countries like Iceland, Vietnam, Morocco or Kenya, among others, do not qualify to be in the MSCI Emerging Markets precisely for reasons of accessibility or size of the market.

What impact could a return to the border have?

A reclassification in The frontier category would be the entrance to a smaller universe of investments. Without a doubt, a big blow to the local market. But a blow that would only confirm what Argentinian assets have suffered since the collapse of August 2019. But, while it may seem paradoxical, in the current situation of the Argentinian market, being honest about the situation could even be positive. at certain levels.

“This could be seen as an advantage, as it would increase both the number of companies included in the index and their participation in it. The only 3 companies in our country that make up the MSCI Emerging Markets index -YPF, Globant and Adecoagro- do so with a weighting of only 0.21% in number of companies and 0.10% in terms of capitalization ”, explains it in a report from Invest Online.

Instead, the same report explains, in principle there would be 8 stocks of Argentine companies that meet the criteria to be part of the MSCI Frontier Markets. In terms of flow, this could generate the entry of passive investments in more Argentine stocks.

Part of that expectation was contributing to the progress, truncated in recent days, that Argentine stocks had in May and early June.

“The possibilities of reclassification in ‘frontier market’ have not harmed local workers since for some, the decline may bear fruit. Argentina would be very strong among the frontier markets and is almost insignificant in the emerging league ”, reasoned an analysis of the consulting firm Econviews.

So the downgrade would lead to increases for stocks?

Not necessarily. Indeed, if the assumption that a part of the gains of local stocks during the last month and a half is maintained, this means that the reclassification at the border is already “charged in price”. That is, investors have already bet on it and the confirmation of the news should not generate major movements.

“Argentina are said to be very strong among the frontier markets and are almost insignificant in the emerging league” (Econviews)

But, in addition, as much of the market argues, the truth is that Argentinian assets today are much more determined by other types of factors. “We do not expect a big change in the event of reclassification, because Today we see Argentine bonds and equities more motivated by the news about what is expected for this year’s election, and the chances of the party in power in these elections, only by the indices and the international phenomena ”, he declared Lucas Gardiner of the personal investment portfolio.

“Beyond a certain flow, the volume of Argentine shares traded will remain low and we do not expect major movements. At least not linked to the reclassification, ”added Gardiner.

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