ARGENTINA RESEARCH

Argentina Strategy 25-Jun-21

Rodrigo Nistor, +54 (11) 4850-2537, Rodrigo.Nistor@ARPartners.com.ar

Strategy ________________________________________________________________________________________
MSCI Reclassified Argentina as a Standalone Market
What does a standalone market status mean? It’s a typical question overheard in la city of Buenos Aires after
MSCI decided to reclassify Argentina from emerging to standalone market. Over the last three weeks, we had
dozens of interactions with local and foreign investment managers. We discussed Argentina’s MSCI potential
reclassification, and the standalone option was considered the less likely one unanimously. The outcome of
the market consultation of Argentina was highly unexpected and should damage local markets, but it is light
years away from a black swan consideration. The extent of the market correction will be largely determined
by the size of positions built around this event, which we believe explain little of Argentina’s recent rally. The
directly affected names will be the ones that compose the MSCI index AGRO, GLOB, and YPF, but splinters
should reach the entire local equity market.
MSCI uses the standalone denomination for newly eligible markets not covered by MSCI or for markets
previously classified as developed, emerging, or frontier markets that severely deteriorated market
accessibility. Argentina is a perfect fit for the latter, but the silver lining is that MSCI considers standalone as a
temporary status. The reclassification of a standalone could occur within or outside the periodic index reviews.
Still, MSCI compromises to consult with clients before any change and provide reasonable anticipation before
implementation. Ceteris paribus and based on the feedback that led to Argentina’s reclassification, the frontier
market denomination seems attainable as a more permanent status. Still, a gradual reduction in capital
controls might be necessary before Argentina can be reclassified. There are cases like Bulgaria and Ukraine
where the standalone designation is in place for more than five years since the conditions that led to the
downgrade were not reverted.
Argentina will officially leave the emerging market tag and become standalone on December 1. MSCI cited the
prolonged severity of capital controls with no resolution as the main reason for excluding Argentina from the
emerging markets index. The MSCI Argentina standard index is integrated by three companies (AGRO, YPF,
and GLOB) but heavily concentrated in Globant, representing more than 80% of the index. Adecoagro and YPF
account for ~10% and ~ 9% of the index, respectively. Approximately US$1,8tr tracks the MSCI EM index, of
which roughly 25% are passive funds. Since Argentina weighs 0.12% in the EM index, the compulsory selling
should be around US$540mn, which in any case should represent less than ten trading days of those stocks.
Actively managed funds should be able to hold their off-index positions if the fund bylaws allow it.
Previous reclassifications from MSCI to standalone have not always implied a short-term market correction.
We analyzed the impact of standalone reclassification on six different countries. The median return the day
after the announcement was 0%, while 90 and 180 days after the announcement, the median return was
5% and 12.7%, respectively. That said, it is hard to detach the impact of MSCI from other market drivers. The
standalone designation decision was based on capital controls and liquidity, and replicability issues in most
cases (see page 3).

© 2021 AR Partners S.A. All rights reserved.

AR Partners S.A. | Arenales 707, 6th Floor | Buenos Aires | Argentina | 54 11 4850 2500 | www.arpartners.com.ar
 ARGENTINA STRATEGY ARGENTINA RESEARCH

Exhibit 1. Price Action Before and After Reclassification to Standalone

Date of Reclassification Announcement = 100
MSCI Pakistan 2008 MSCI Venezuela 2006 MSCI T&T 2011 MSCI Bulgaria 2015
MSCI Ukraine 2016 MSCI Argentina 2008 MSCI ARGENTINA 2021
260,00

210,00

160,00

110,00

60,00

10,00
-365
-348
-329
-310
-293
-274
-257
-238
-219
-202

-166
-147
-128
-111
-183

-92
-75
-56
-37
-20
-1

107
126
145
162
181
198
217
236
253
272
289
308
327
344
363
16
35
54
71
(40,00) 90
Source: Bloomberg, MSCI, AR Partners

Exhibit 2. Index Returns to and from standalone reclassification date and Argentina’s 2008 downgrade
Days from
MSCI Pakistan MSCI Venezuela MSCI T&T MSCI Bulgaria MSCI Ukraine MSCI Lebanon MSCI Argentina MSCI Argentina
Annoucement Median Return
2008 2006 2011 2015 2016 2021 2008* 2021
Date
-365d -34,7% 62,1% 1,4% -15,5% 27,1% 80,2% -37,4% 60,0% 14,2%
-180d -28,2% 84,1% 5,7% -5,0% 31,5% 24,5% -49,2% 13,3% 9,5%
-90d -1,9% 45,1% 9,6% 5,1% -10,8% -6,8% 0,9% 13,3% 3,0%
-30d -0,3% -1,1% 9,6% 6,2% 0,4% 0,4% -9,5% 7,8% 0,4%
-7d -0,3% -7,4% 1,3% -3,6% 0,7% -0,8% -2,6% 2,2% -0,5%
-1d 0,0% -1,4% 0,0% 0,0% 0,8% -0,3% -2,4% 1,0% 0,0%
1d 0,0% 1,5% 0,0% -0,8% 1,3% 0,1% -1,4% 0,0%
7d -14,9% 2,4% 0,3% -1,1% -1,1% 4,3% -4,7% -1,1%
30d -45,9% -4,2% -0,9% -4,1% 6,5% 16,4% -10,5% -4,1%
90d -44,3% 5,0% 3,6% 7,2% -2,8% 51,5% 24,0% 5,0%
180d -32,4% 3,4% 12,7% 32,0% -26,8% 53,2% 38,2% 12,7%
365d -9,2% -9,5% 7,6% 57,0% -22,7% 53,5% 77,8% 7,6%
Source: MSCI, Bloomberg, AR Partners *MSCI reclassified Argentina as a frontier market in 2008

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 ARGENTINA STRATEGY ARGENTINA RESEARCH

Exhibit 3. MSCI reasons for standalone reclassification in analyzed cases

Country Index and Year Rating Action Reasons
Due to the prohibition of securities from trading on the exchange below the closing prices of August 27,
MSCI Pakistan 2008 From Emerging Market to Standalone 2008, the "floor rule" has led to the near total paralysis of market activity in Pakistani equities and caused
significant distortions to investors' portfolio valuations by maintaining prices at artificial levels.

Due to the continued presence of investability restrictions linked to the foreign exchange regime put in place
MSCI Venezuela 2006 From Emerging Market to Standalone in the country in February 2003, the lack of liquidity of most of its constituents and the continued weight
decrease of the MSCI Venezuela Index in the MSCI Emerging Markets Index over the last several years.

MSCI T&T 2011 From Frontier Market to Standalone Due to persistent deterioration of liquidity

MSCI Bulgaria 2015 From Frontier Market to Standalone Due to continuous decline in size and liquidity of the Bulgarian equity market.

Due to the introduction by the National Bank of Ukraine of restrictions on capital flows which may impact
international institutional investors. In particular, since March 4, 2015, foreign investors have been
MSCI Ukraine 2016 From Frontier Market to Standalone
prohibited from repatriating funds received from the sale of equity securities issued by Ukrainian entities and
from dividends.
Due to the continued restrictions to in- and outflows of capital in the Argentinean equity market. MSCI from
MSCI Argentina 2008 From Emerging Market to Frontier Market this point only considered American Depositary Receipts (ADRs) of Argentinean companies as eligible
securities for inclusion in the MSCI Argentina Index.

Despite the fact that the MSCI Argentina Index remains replicable given that only foreign listings are eligible
MSCI Argentina 2021 From Emerging Market to Standalone for inclusion to the index, the prolonged severity of capital controls with no resolution is not in line with the
Market Accessibility criteria of the MSCI Emerging Markets Index.

Source: MSCI, Bloomberg, AR Partners

© 2021 AR Partners S.A. All rights reserved.

AR Partners S.A. | Arenales 707, 6th Floor | Buenos Aires | Argentina | 54 11 4850 2500 | www.arpartners.com.ar 3
ARGENTINA STRATEGY ARGENTINA RESEARCH

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