Continuing restrictions on market access in China, India and Argentina remain a key concern for emerging and frontier market investors, according to Russell Investments’ Market Risk Review. The review also shows Egypt has again failed to meet the criteria for an emerging market.
Egypt: On the Edge
Egypt has become increasingly risky, primarily as a result of political instability contributing to declines in currency reserves, foreign direct investment and tourism. Mohamed Morsi was elected president in June and efforts to strengthen the country’s domestic economy amid rising prices and budget deficits have thus far been mixed.
These factors have led to the country’s inability to meet Russell Indexes’ macro risk standards for emerging markets. It is in year two (of three) on the path to be reclassified from emerging to frontier market.
Argentina: Questions about Viability
Argentina is the sixth largest economy within the Russell Frontier Index and a top-10 country in terms of exposure within the Index, but growing political intervention, decreased foreign ownership of equities and increasing instability has fed inflation and unrest, leading many frontier markets asset managers to routinely avoid this market.
Read: Frontier economies offer opportunities
In addition, tight and entrenched currency controls have introduced a level of operational risk that has called into question Argentina’s viability as a frontier market. Argentina is in year one (of three) of the Russell Indexes market risk review process.
India: Continuing Barriers to Entry
India is currently part of the Russell Emerging Markets Index, and while it is not currently under review, the country’s investment account setup requirements are among some of the most onerous of any market Russell Indexes monitors. In India, slow growth has weighed on the rupee and high import fuel costs have driven inflation.
In addition, burdensome registration and tax requirements have frustrated global investors, raising concerns that it may be difficult for global investors to replicate index exposures through the local market.
China: The Devil is in the Details (of A-Shares)
China is also part of the Russell Emerging Markets Index. While China is a growing economic player on the global stage, the transparency of financial information and corporate governance remain concerns for investors trying to track risk exposures.
Domestic investors also have access to a different and much larger class of shares (A shares) than foreign investors. Russell Indexes welcomes the Chinese government’s recent moves to expand the allocation of A share quotas for global institutional investors, but the A share market is still too restricted to be included in the Russell Global Index and for China to be considered anything but an emerging market from a global investment standpoint.