Change is Good: MSCI Tweaks Frontier Market 100 Index

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Highlighting the flaws in the MSCI Frontier Markets Indexes has been a theme on Investment Frontier of sorts (see here and here). One of the biggest issues we’ve raised was the classification of Qatar and the United Arab Emirates as frontier markets, even though they are two of the richest countries in the world from a GDP per capita standpoint.

Fortunately as of May 2014, Qatar and the UAE graduated from Frontier Market to Emerging Market status in MSCI’s indexes. Going the other way was Morocco, which was demoted from being an Emerging Market. With a GDP per capita just above $3000 and difficult market liquidity conditions, it fits more into the mold of what is usually considered a frontier market.

These changes will take place over the next six months with the revised version of the new MSCI Frontier Market 100 Index to be completed by November 2014.

Here are the changes in overall weightings in the MSCI Frontier Markets 100 Index, comparing what the weightings are as of June 10th (the release date of their Annual Market Classification Review) and the proposed final form of the index in November:

MSCI Frontier Market 100 Index Change

Here are the overall country weightings for the revised MSCI Frontier Market 100 Index: MSCI Frontier Markets 100 New Weightings

Who are the winners and losers from these changes?

Winners:

Pakistan

With a leading 4.6% increase in weighting, Pakistan continues to bask as the golden child of frontier markets at the moment. The two largest companies being added to the index are both from Pakistan (Pakistan Tobacco, K-Electric), and four companies will also be added to the MSCI Frontier Markets 100 Index from Pakistan in total (Lucky Cement, Pakistan State Oil), with one (Hub Power Company) exiting the index.

Frontier Investors

Over half the MSCI Frontier Markets 100 Index used to be concentrated in the three Middle Eastern countries of Qatar, UAE, and Kuwait. With the first two now counted as Emerging Market countries, the new weightings are more diverse geographically: the four largest countries by weightings are now from separate continents.

Losers:

Ukraine

As if Ukraine was not having a hard enough time, their lone representative, Motor Sich (UX), is being left off the revised index according to MSCI’s files. Sure it only accounted for 0.07% of the index, but diversity is good right?

Frontier Investors

We track over 50 frontier equity markets in our Market Dashboard, and even the MSCI has classified 32 countries as frontier markets. So why are only 18 countries represented in the index (down from 20), with a third of those countries accounting for less than 2% of the total weighting? Kuwait itself takes up over a quarter of the new index.

Conclusion:

The country re-classifications and subsequent weightings changes are steps in the right direction. The MSCI Frontier Markets indexes are still lacking when it comes to representing a great enough range of markets, but they are definitely not as lopsided as before.

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