TCM Blog - Effect of Frontier/EmergingMarket Reclassifications on share prices

2019-11-04

In their most recent blog article, TCM looks at how Frontier/Emerging Market Reclassifications effect share prices - using the limited external research that exists -  and how that will impact on Vietnam which is likely to be a future candidate.


The most recent article was published in 2017 in the CFA Institute Financial Analyst Journal: "Investing in the Presence of Massive Flows" by Burnham, Gakidis and Wurgler.

Looking at 17 MSCI reclassifications between 2000 and 2015, the authors investigated what happens to market returns before, during, and after reclassification. They found that when a market is upgraded, for example from frontier to emerging, its MSCI country index rises, on average, by 23.2% between the announcement date and the effective date, or when the reclassification occurs. A year after the reclassification, most of this extra performance is given back through a -12.4% return.

Similarly, when a market is downgraded, the average performance between the announcement date and the effective date is -12.5%. A year later, the market enjoys a 23.3% return.

Given the huge importance of the MSCI indices and the fact that reclassifications require thousands of asset managers to decide how to react, it is surprising that there has been little systematic study of what happens around reclassification events.  

Looking ahead TCM  sees Vietnam as a likely candidate that to benefit from the above
statistical trends. Once Kuwait exits the Frontier Markets index, Vietnam will become the largest country within the FM index. So that means a promotion within the index itself, whereby the weighting increases from 18% to around 27%.

In addition, MSCI is expected to announce in June 2020 that Vietnam will be promoted to the index of emerging countries per June 2021. MSCI-EM inclusion is significant for Vietnam as there are about $200 billion of ETFs that track the MSCI-EM index. When Vietnam gets included in the MSCI-EM index it will almost certainly trigger over $3 billion of inflows to its stock market.

Highly relevant for the TCM Vietnam High Dividend Equity Fund

Read the full article on the blog section of the TCM web site

 



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