Argentina MSCI review holds key to foreign investment surge

MSCI Inc will decide next week whether to set Argentina on the road back to membership in global stock indexes, a move that could trigger a rush of funds into the illiquid local market.

The index compiler will release its Classification Review on June 23, indicating whether it will leave Argentina on Standalone status, or start consultations over its return to frontier, or even emerging market rank.

Morgan Stanley expects MSCI to place Argentina under formal consultation to become an emerging market, a move it estimates would attract about US$5 billion into local shares. That would be a big inflow for a market where daily trading volume has averaged less than US$60 million this year. Still, Balanz Capital forecasts that Argentina will be left on Standalone status.

“It seems very likely that Argentina could qualify for a double upgrade into emerging markets over the course of the next year or year and a half,” said Nikolaj Lippmann, Latin America equity strategist at Morgan Stanley. “The most likely scenario is that Argentina will get included in the early stages of 2028.”

Investors may get their first clue later Thursday, when MSCI publishes its annual Market Accessibility Review. While the report does not define classifications, any changes to its assessment of Argentina’s conditions could offer hints about the country’s prospects ahead of next week’s report.

Regaining momentum

An upgrade would be the latest vote of confidence in President Javier Milei’s plan to remake the Argentine economy, which has already earned several nods from credit assessors. Country risk is sitting at an eight-year low, and both S&P Global Ratings and Fitch Ratings recently lifted the country’s sovereign rating.

Argentina’s equity market has also gone through a dramatic cycle since Milei came to office in December 2023. Stocks nearly doubled during his first year in office as investors cheered efforts to tame inflation, slash the fiscal deficit and stabilise the economy. The rally, which stalled ahead of uncertainty around midterms, has since resumed. The S&P Merval index is near a 17-month high in dollar terms, supported by elevated oil prices, stronger earnings from energy companies and growing optimism over MSCI’s decision.

Argentina's Stock Index Hit a 17-Month High This Month

Recent gains have been fueled by a renewed influx of foreign investors. About $103 million has flowed into the Global X MSCI Argentina ETF this year, according to data compiled by Bloomberg.

Read More: Druckenmiller Leads Return to Argentine Stocks: Shock Therapy

Index Share

Morgan Stanley estimates that an upgrade to emerging market could give Argentina a weighting of 0.28 percent in the EM index and 4.1 percent in the Latin America index, with most of the demand focused on energy and financial stocks.

MSCI last upgraded Argentina to Emerging Market status in 2018 during the administration of former president Mauricio Macri. Back then, the government dismantled capital controls and reopened financial markets to foreign investors – putting Argentina back into the global investment world following years of market isolation.

But the return proved short-lived.

Following a deepening crisis in 2019, Argentina reimposed controls and expanded them further after a left-wing administration was ushered in. MSCI eventually removed the country from the index and relegated it to the Standalone category it has held since 2021.

Since taking office, Milei‘s administration has reversed several of those restrictions, easing access to foreign-exchange markets and loosening dividend repatriation rules. It has continued to dismantle some of those barriers gradually, including by relaxing regulations governing local stockbroker operations this week. Still, important limitations affecting foreign institutional investors remain in place and Central Bank officials have indicated they are in no rush to fully remove them.

Those lingering restrictions are one reason some investors remain unconvinced that MSCI is ready to move.

“The most likely outcome is that nothing happens and Argentina remains as Standalone,” said Ezequiel Fernández, head of equity research at Balanz Capital, a local broker. “The kickstart of a revision for EM inclusion is still possible, but capital controls for hot money remain the key issue.”

by David Feliba, Bloomberg