Malaysia yesterday joined index provider FTSE Group's watch list for possible promotion to advanced emerging market status, while China A-shares and Taiwan remain on watch for promotion to secondary emerging and developed status, respectively. The moves follow the FTSE's annual review of country classification for its Global Equity Index Series (GEIS).
In addition, South Korea will become part of FTSE's developed market series on September 21, a development that was announced last year. "There's been such interest in Korea's inclusion in the developed indices that we would expect to see some interesting investment flows as a result," says Imogen Dillon-Hatcher, London-based executive director of global sales at FTSE.
Malaysia has made significant advances as a result of the government's and exchanges' programme to enhance the capital markets and relax restrictions, says Dillon-Hatcher. For example, the easing of rules on foreign fund and investment managers will help develop the market.
However, Malaysia's foreign exchange and derivatives markets are not sufficiently developed to warrant a 'pass' in those areas, she adds. It would also help if the country relaxed certain foreign ownership, stock lending and short selling restrictions.
As for the potential benefits to Malaysia, Dillon-Hatcher says larger tracker funds follow FTSE's country-classification process, and this type of classification results in positive investment flows and leads to inclusion in broader indices.
Meanwhile, although China A-shares and Taiwan do not yet meet the criteria to move to the next category, they have made some progress, she says. In the China A-share market, the QFII quota has been increased, and more QFII companies have been added. "Taiwan has made a number of changes," says Dillon-Hatcher, "and the authorities there are clearly aware of the importance of this process and are working through the list systematically."
However, China A-shares need to make advances in several areas, such as fair treatment of minority shareholders, foreign ownership restrictions, repatriation of capital and income, the FX and derivatives markets, and the registration process for foreign investors. In addition, it has yet to allow stock lending, short sales or off-exchange transactions.
And Taiwan still has restrictions that need to be relaxed in certain areas -- its FX market, clearing and settlement, stock lending, short sales and off-exchange transactions -- before the country can be categorised as a developed market.
The other changes to be implemented within the FTSE GEIS in September 2010 are that UAE will be included as a secondary emerging market, Argentina will be demoted from secondary emerging to frontier status and Malta will be included as a frontier market.
Meanwhile, Iceland has been removed from the watch list; while it fulfils the quality-of-market criteria for advanced emerging status, it does not meet the minimum market capitalisation for inclusion in the GEIS.
Global equity market structures evolve on an ongoing basis, says the index provider, and FTSE works closely with stock exchanges and regulators throughout the year to ensure its benchmarks remain an up-to-date and accurate reflection of the investment opportunity in global markets.
Working with an expert committee of independent market practitioners, FTSE formally reviews country classification within its global index series on an annual basis using an advanced, transparent and consistent methodology.
FTSE monitors countries on its watch list for possible promotion and demotion between four categories: developed, advanced emerging, secondary emerging and frontier status.