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Must-know changes to frontier market investments

Russ Koesterich, CFA of BlackRock

Qatar and UAE outgrow their frontier status: Investor takeaways (Part 2 of 5)

(Continued from Part 1)

The big changes: Next month, two countries will officially graduate out of the MSCI frontier markets universe and enter the world of emerging markets: Qatar and the United Arab Emirates (or UAE). In addition, MSCI will also implement a number of methodology changes to the index.

Market Realist – As revealed by MSCI, you’ll see many changes to the MSCI Frontier Markets 100 Index. The parent index will change from the MSCI Frontier Market Index to the MSCI Frontier Markets Investable Market Index.

Another significant change would be a 40% cap on the cumulative weight of the largest two countries in the index, ensuring that the index isn’t skewed in favor of a few nations. MSCI also announced on June 11, 2013, that Qatar and UAE—earlier a part of the frontier markets index—would be recategorized as emerging markets instead.

Even if Qatar and UAE’s financial markets are somewhat underdeveloped, both countries can hardly be counted as frontier markets anymore, with per capita incomes well in excess of some advanced economies. However, their departure from the frontier markets is a big deal given their stellar performance since the beginning of 2013 and the fact that they represent nearly 36% of the underlying index.

Market Realist – By the very definition of “frontier markets” as countries that are in a pre-emerging economic and political phase, UAE and Qatar don’t qualify. The per capita income of both countries is higher than even some developed nations, as the graph above shows.

In fact, Qatar—at $93,352—has the highest per capita income in the world. UAE, with a per- apita income of $41,692, ranks higher than even Japan (EWJ) and the European Union (EZU). UAE more than comfortably beats emerging nations (EEM) like Brazil (EWZ), India (EPI), and China (FXI).

Read on to the next part of this series to learn more about the effect of the departure of these two nations from the Frontier Market Index.

Continue to Part 3

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