MSCI releases market classification review

China’s inclusion in the MSCI index has been delayed, while Pakistan may be reclassified and Saudi Arabia’s inclusion is being considered

Shanghai, China. Many were surprised that the country was not included in the 'Emerging Market' section of the MSCI 2015 Market Classification Review 

The Morgan Stanley Capital Index has released its MSCI 2015 Market Classification Review, which determines the inclusion of each country into the MSCI indexes and which market category it should occupy.

[I]nvestor concerns were cited as the reason for the continued exclusion of China [from the Emerging Market Index]

The research firm provides a series of indexes to measure the performance of stock markets around the world. It divides countries into different market categories, such as the World Index, which is composed of 23 developed economies, the Emerging Market Index and the Frontier Market Index. The total market capitalisation of each country’s listed companies are aggregated and then added to that of the rest of its peer group to work out a global benchmark. These benchmarks are used as a base by exchange-traded funds and as a means for comparison by managed mutual funds.

This year’s review was widely expected to announce that China’s A-shares would be included in the Emerging Market Index. However, according to the MSCI, “China A‐shares will remain on the 2016 review list for potential inclusion into Emerging Markets.” Chinese companies based in Hong Kong are already included, but Chinese A Shares, those listed domestically, have a number of restrictions upon purchase by foreigners.

While the MSCI praised Chinese stock regulators for their liberalisation efforts, investor concerns were cited as the reason for the continued exclusion of China. Investors, the report notes, were still apprehensive about China’s quota allocation process, restrictions on capital mobility and repatriation, as well as beneficial ownership of investments. MSCI is working with Chinese financial authorities and says that the country will be included once these concerns are adequately addressed.

Pakistan may see itself promoted from the Frontier Market Index to the Emerging Market Index, with the report noting that it has been added to the review list of 2016 Annual Market Classification Review. Pakistan’s stock market has seen a number of positive developments that satisfied the MSCI’s accessibility criteria and increased liquidity.

The report also recognises Saudi Arabia’s recent opening up of its stock market to foreign investment, noting that a standalone index of the Saudi stock market has been compiled, using its Emerging Markets Index methodology. However, the MSCI will first “monitor the effectiveness of the opening of the market and gather feedback from international investors,” before considering the country’s inclusion in the index.