Beware MSCI’s Inertia If You’re Tracking Its Indexes: Macro View

LAGOS (Capital Markets in Africa) – MSCI’s decision to delay the return of Argentina to emerging-market status while extending a lifeline to Nigeria means investors may be shut off from the benefits of Mauricio Macri’s reforms, while remaining subject to the impact of policy inaction from Muhammadu Buhari. 

• The Argentina decision could spark a selloff in the country’s stocks, ironically making it more difficult for authorities to maintain capital-market freedoms. Macri has ended a decade-long battle with creditors and embarked on reducing government waste. A successful bond issue this month underscored investor confidence in his policies. Without his reforms translating into visible gains, Macri may also have a harder time maintaining support for the changes.
• MSCI delayed Argentina’s promotion for the same reason it spared Nigeria the ax: lack of time for a fuller assessment. Yet, it has had almost two years to observe the reform trajectory of both nations.
• Argentina and Nigeria have been following diametrically opposite policies since 2015. Nigeria pegged the naira to the U.S. dollar in 2015, plunging the country deeper into a currency crisis. President Buhari’s administration last year announced a float with a lot of fanfare, but it turned out that it was not a float at all. Investors fled naira assets even as the government cracked down on unofficial channels supplying hard currency. Nigeria’s new foreign-exchange window falls short of a full float for the naira. The country is wedded to capital controls, and access to hard currency often comes down to political connections.
• MSCI has sent a message that a dual exchange rate is all it needs to keep Buhari’s nation in its frontier-market indexes. Nigeria, whose “investability” is under question according to MSCI’s own words, continues to enjoy a 7.3% weight in its frontier-market gauge. On the other hand, emerging-market tracker funds won’t be able to capitalize on Argentina’s valuation appeal: the market now trades almost at par with peers, slipping from a premium of 38% in February.
• Investors relying on MSCI indexes to get exposure to different types of markets would do well to consider the inertia pitfall when looking at their overall risks, opportunities and asset allocation.
• NOTE: Srinivasan Sivabalan is an editor for Bloomberg News. The observations he makes are his own and not intended as investment advice.