30th May 2014
Qatar and the United Arab Emirates have been promoted to emerging market status from their previous frontier market designations by index firm MSCI.
Sam Vecht, manager of the BlackRock BSF Emerging Markets Absolute Return Fund, says the change will see the markets attracting more money as emerging markets are followed by more index tracking fund managers. However given that investors were already anticipating the news, Vecht says valuations remain high. The Etf for the UAE has surged ahead this week, as website Etf Trends reported.
He says: “Promotion criteria for an individual stock market combine quantitative and qualitative factors. The quantitative factors centre on the size of companies and the liquidity of the market. To qualify as an Emerging Market the stock market must contain at least 3 companies which have a market cap greater than $1.26bn, a full float over $630m and a liquidity threshold of at least 15% ATVR. The stock market must be sufficiently open to foreign investment, having an efficient, robust operational framework which is institutionally stable. Similarly the ease of capital flows in and out must be significant.
“The more senior an index is, the more money is allocated to either tracking or beating it, similar to a football team being able to generate more revenues from ticket sales. As a result of the promotion, both Qatar and the UAE will be part of an index which garners a lot more attention. Money dedicated to Frontier Markets countries totals around $20bn. By contrast, assets dedicated to Emerging Markets totals around $1trillion. However, just like a newly promoted team formerly at the top of the pile, the two countries will now find themselves at the foot of the table when it comes to significance and may well be overlooked in favour of more well established Emerging Market countries like Brazil, Russia, India or China.
“Unlike the football promotions which were not finalised until last weekend’s breathless play-offs, the transition of Qatar and UAE has been known for some time and many investors have positioned for the event well ahead of time. This means valuations in some UAE stocks became unusually high, and we became increasingly concerned by the rapid rise in certain share prices.
“We much prefer the large number of Frontier markets, where the macro-economic situation is robust or improving, where companies are growing fast, and valuations are compelling. While no investment in Frontier Markets is without risk, we would highlight Bangladesh, Romania, Saudi Arabia and Sri Lanka as looking particularly interesting at present.”