In September, Peru risked losing its emerging market status and being downgraded to frontier by stock indices provider MSCI. Lima bourse’s chairman, Christian Laub, explains what it would have meant to the country – and how it managed to hold on to its rank.

The senior management at the Lima Stock Exchange must have sighed with relief on September 30, when MSCI reconfirmed Peru’s emerging market status. Its chairman, chief executive and business development manager had been on a gruelling roadshow talking to investors from London to New York, Boston, Philadelphia and San Francisco, urging them to make the case for Peru with the international indices provider. 

A month earlier, MSCI had launched a consultation to potentially downgrade Peru to frontier market in its stock indices. Its concerns were about the smaller number of investible stocks, as the firm’s requirement were now met by only three Peruvian issuers, down from 12 in 2014. The slump in commodities prices had badly damaged mining groups in particular, the economy’s main drivers. If one more company slipped off the investible stocks group, the Latin American market would automatically be considered a frontier one.

Worrying implications 

A lower classification would have made Peru a harder sell with international investors. It would have also derailed the stock market integration between Peru, Chile, Colombia and Mexico, known as MILA, according to Christian Laub, chairman of the Lima Stock Exchange. The initiative is part of the wider integration project between the four countries, known as the Pacific Alliance. “How do we get to move forward with MILA and the Pacific Alliance if we’re a frontier market? How do you mix a frontier market with [three] emerging markets? It doesn’t make sense,” says Mr Laub. 

Luckily for Peru, its stock exchange’s roadshow worked. But this is not down to luck, according to Mr Laub; it owes its success to a programme that began years ago but that needed to be communicated better to interested parties. 

“[MSCI had] valid concerns, if you look at liquidity, number of companies and market capitalisation. But if you look at what we’ve been trying to accomplish over the three years I’ve been at the Lima Stock Exchange, [it’s clear that] we’re not improvising,” he says.

Indeed Peru is going ahead with a number of reforms aimed at improving the size, depth and volumes of trading on its stock exchange. One of the most recent is the exception from capital gain taxation on certain trades, which will become effective in January 2016. This is applied to investors that have traded less than 10% of a single company’s total stock over a period of 12 months, and for shares that are considered liquid – something that ought to encourage the use of market makers. The exemption not only eliminates tax costs, it also reduces the administration burden of filing tax forms and dealing with related queries, according to Mr Laub – something that he says has put off many investors. 

Furthermore, the stock exchange has upgraded its core system to improve securities lending and short-selling capabilities, while Peru’s securities regulator is granting authorisation to carry out algorithm trading in the country, aligning it to the other MILA exchanges. New rules that facilitate market making and the introduction of real estate funds are also being discussed.

Bringing them back 

But what should also be taken into account, according to Mr Laub, is the kind of work that goes beyond systems and regulation. On this front, Mr Laub and his team are talking to individual companies that are just short of meeting the MSCI criteria, with the aim of bringing them on board. 

“If prices of commodities start going up, a lot of companies will reappear [in the group]. But we cannot wait for that to happen. What can we do, what is in our control, is to get the fourth, fifth or sixth [investible company ready,]” he says.

“We identified IFS, the holding for Interbank, the fourth largest bank in Peru. It complies on market capitalisation but not on average daily traded volumes. So we told it to ‘hire a market maker and move your shares’. The next one would be Alicorp, which is a consumer company in Peru – it doesn't comply in market capitalisation but if [macroeconomic] figures start getting better, this is immediately reflected on internal demand and its [share values]. It needs to build on liquidity so we’re asking it to do so.”

The third company, says Mr Laub, is IC Power, an electricity producer owned by Israeli investors but where two-thirds of production will take place in Peru by 2016. Management is also based locally and so it could effectively be considered a Peruvian name, according to Mr Laub. “[IC Power is] planning an initial public offering. It is thinking about New York because of size but we need to convince it to do a dual listing... With the capital gain reduction it makes sense to be listed in Peru.”


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