Peru may be at risk of being downgraded from an emerging market to a frontier market.
In August 2015, Morgan Stanley Capital International, which manages these benchmarks, decided to wait and see whether Peru’s market condition improves. It had considered the move because Peru’s market has low levels of liquidity. Such a move would have had a negative impact on the Peruvian market, as institutional and index funds with emerging market mandates would likely have to divest from this South American market. But the country’s status as an emerging market expires in June 2016, at which time MSCI will again evaluate how to classify the market. Despite the looming deadline, Peruvian officials have indeed made progress in meeting the criteria for remaining an emerging market.
One of the requirements for being an emerging market is having at least three stocks of a certain size, based on market capitalization, liquidity, and trading volume, among other factors. Peru has a few stocks that meet most of these criteria: Credicorp (BAP) , Southern Copper, and Buenaventura. Two new stocks also appear to pass the test: IFS and Alicorp. That Peru would have five stocks of a certain size should help it hold onto its status as an emerging market. However, MSCI is also reexamining Southern Copper because it is listed in the U.S., where it is incorporated, despite its significant operations in Peru. If MSCI were to reclassify this stock into the U.S. index, it would be a blow to Peru’s chances of remaining an emerging market.
Another positive development is that Peru’s market liquidity has been steadily increasing. As of August 2015, Peru had only $23 billion in free float market capitalization — versus $242 billion in Mexico, for instance. But since then, local officials have pushed for market friendly initiatives like removing a capital gains tax in order to attract more investment. Since last summer, the market has seen an increase of 35% (in its currency, the nuevol sol). This is a positive development, and in it has happened in short order, as market volume troughed last year.
All things considered, Peru should keep its status as an emerging market, which will probably benefit several stocks, including Credicorp, which is listed in the United States. It is a large financial company that operates many business divisions, from traditional banking to asset management.
When Peru’s status was first called into question, the stock declined some 30%. But if the downgrade overhang is removed once and for all, Credicorp, and the Peruvian market as a whole will be worthy of investing.
[This article was also published in TheStreet]
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned. Kabir Sehgal is the author of New York Times bestseller Coined: The Rich Life of Money And How Its History Has Shaped Us. He is also a Grammy winning producer. Follow him on Facebook and Twitter.