MSCI Tells China To Wait, May Reclassify Nigeria

China’s recent efforts to make it easier for global investors to access its enormous stock markets in Shanghai and Shenzhen were not enough to persuade MSCI to include these “China A shares” in its widely followed Emerging Markets Index just yet.

Released June 14, the index provider’s 2016 Market Classification Review said investors need a period of observation to assess the changes, which it called significant improvements.

MSCI also announced at the same time that the MSCI Nigeria Index could be removed from its Frontier Markets Index and reclassified as a stand-alone market “due to capital mobility issues.”

MSCI noted that the Central Bank of Nigeria had pegged the local currency, the naira, to the dollar in February 2015, resulting in a sharp decline in liquidity in the foreign exchange market. “Hence, the ability of international institutional investors to repatriate capital has been significantly impaired to a point where the investability of the Nigerian equity market is being questioned,” the firm said.

The day after the MSCI announcement, Nigeria said it would allow the naira to trade freely in an effort to end the shortage of foreign exchange. The expected steep devaluation could boost the economy and make it easier for foreign companies to do business in the country, but it could also worsen already-high inflation.

MSCI’s decision on its proposal to reclassify the Nigeria Index is due by September, with potential implementation in November 2016.

As part of its classification review, MSCI said its Pakistan Index would be upgraded to emerging markets status in May 2017. Share prices on the Karachi Stock Exchange soared to a record high in response to the change, which bankers said could attract inflows of a few hundred million dollars.

MSCI is adding its Argentina Index to the review list for potential reclassification to emerging markets status next year. The Central Bank of Argentina abolished foreign exchange restrictions in December 2015, and there has been a significant reduction in the capital lock-up period for investments, MSCI said. “Consequently, the Argentinian equity market meets most of the accessibility criteria for emerging markets,” it added.