Peruvian equities and country-specific exchange traded fund investors breathed a sigh of relief as a recent ruling helped ease fears that MSCI indexing would downgrade the emerging market to frontier status.
The iShares MSCI All Peru Capped ETF (NYSEArca: EPU) gained 2.8% Friday. Peru has also been one of the best performing emerging market this year, with EPU surging 45.7% year-to-date.
Peru’s equity market rallied Friday after MSCI kept Southern Copper within the Peru index. Southern Copper is one of three Peruvian equities that meet MSCI’s “investable” requirements, and the indexer requires an “emerging market” to have at least three investable-designated stocks, according to Peru Reports.
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In the event MSCI moved Southern Copper out of its Peru index, Peru would have been downgraded to “frontier” status.
“With Southern remaining in the Peru index, it will ease concern among investors about what happens in June. Peru is going to stay as an emerging market,” Fernando Saavedra, a money manager at pension fund Prima AFP, told Bloomberg.
[related_stories]Some observers are not pleased with MSCI’s decision, arguing that Southern Copper should be moved to MSCI’s USA equity index since the company is incorporated in Delaware and headquartered in Arizon. Moreover, only 45% of Southern Copper’s business is from Peru and the majority is in Mexico.
Analysts, though, warned that reclassifying Peru could trigger $1.5 billion to $5 billion in outflows from the emerging market as financial products and institutions that track MSCI emerging market indices shift out of the Latin American market.
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In the meantime, Peru’s finance ministry and the Lima stock exchange have actively worked toward bolstering liquidity and supported other stocks that could eventually meet MSCI’s investable requirements, potentially solidifying the country’s emerging status. Peru previously avoided a downgraded to frontier market in August 2015 due to low liquidity in the Lima stock exchange – the uncertainty triggered a 5% drop on the exchange in one day of trading.
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iShares MSCI All Peru Capped ETF