Leading index-provider MSCI’s incorporation of two Peruvian companies’ stock into its small-cap index has eliminated the pending risk of reclassifying Peru as a “frontier market.”
Shares of Volcan mining company and Graña & Montero construction have joined the ranks of three other Peruvian equities that qualify as “investable” according to index-fund provider Morgan Stanley Capital International. The companies were included in MSCI’s Global Small Cap index as a result of the group’s move to re-balance its global indices this week.
MSCI’s incorporation of Volcan and Graña & Montero stocks into their Small Cap index, a classification for companies with market capitalization between $300 million and $2 billion, ensures Peru’s classification as an “emerging market,” a status threatened in recent years by low liquidity in the Lima stock exchange.
“We now have five equities and this will ensure that we no longer face the risk of demotion to frontier market status. Also important is that [these equities] have been included in the Small Cap index which in turn will motivate more investors to buy and continuing buying Graña & Montero and Volcan stocks and adding to stock exchange liquidity in general,” Christian Laub, director and former president of the Lima stock exchange, told El Comercio.
In August 2015, MSCI called into question its classification of Peru as an “emerging market” despite standout economic growth in the region due to low liquidity in the Lima stock exchange, an announcement that spurred a 5% daily selloff and 13% drop on the week. MSCI requires a minimum amount of selling activity from “emerging markets” for investors who need to sell their holdings quickly.
In a scramble to prevent demotion from “emerging market” status to “frontier market” status and halt the potential reclassification, which analysts estimated could prompt capital flight of $5 billion from Peru, the finance ministry and the Lima stock exchange developed a strategy to increase selling activity by cutting capital gains, reducing fees and allowing trading of new financial instruments.
Despite such efforts, MSCI warned Peru that it could also be downgraded at any time if it lost any one of its three eligible stocks – Credicorp, Buenaventura or Southern Copper – which qualify for the MSCI Investable Universe.
“The MSCI Peru Index will remain in the MSCI Emerging Markets Index. However, [MSCI] will proceed with the reclassification of Peru to Frontier Markets status in the event that the MSCI Peru Index falls short of the minimum requirement for Emerging Markets that the index contains at least three constituents,” MSCI said in a statement in June 2016.
MSCI had been facing pressure from some investors to reclassify Southern Copper as a United States equity because it is incorporated in the United States and its stock is traded there. But the incorporation of Volcan and Graña y Montero into its small-cap index will quell fears of downgrading Peru to a “frontier market” and, for the time being, secure its place in the emerging-markets index.