Institutional investors' exposure to emerging markets and frontier markets is set for big changes following the reclassification of two Middle Eastern countries by MSCI Inc.
On June 2, Qatar and the United Arab Emirates will move out of the MSCI Frontier Markets index and into the MSCI Emerging Markets index. Both countries have long campaigned for entry to the emerging markets club.
The change carries implications not only for the indexes and the countries in them, but also for institutional investors. Those tracking the EMI will gain exposure to the oil-rich markets, and those investing through the FMI will have more exposure to fast-growth economies such as Nigeria and Kenya. The change will increase the Frontier Markets index's exposure to markets in Africa, Asia and Latin America, said money management executives.
“When the U.A.E .and Qatar leave there will be other markets that will be much more important — Kuwait and Nigeria for example,” said Maarten-Jan Bakkum, The Hague, Netherlands-based senior emerging market strategist at ING Investment Management. “These two will then be by far the biggest markets in the new frontier index.”
According to information from Baring Asset Management, the Frontier Markets index has a collective 36.3% weighting to Qatar and the UAE. Kuwait has a 17.6% share and Nigeria, 11.7%.
On June 2, Kuwait is set to take the biggest weighting, at 26.6%, and Nigeria will come in second, at 18.7%. Barings said in a note alongside its data on the new index that the reclassification “will proportionately increase the exposure to the long-term growth potential markets in Africa, Asia and Latin America, as well as other markets in the Middle East such as Kuwait and Oman.”