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Country classification: Not just a question of income

Setting a country classification framework for global equity markets requires more than a focus on relative wealth.

Equity markets in FTSE’s Global Equity Index Series fall into one of four categories: developed, advanced emerging, secondary emerging and frontier. The classification process includes an initial screening of countries by their gross national income per capita, using World Bank data.

There’s clearly a correlation between development status and relative national wealth. For example, the G7 nations had average gross national income (GNI) per capita of $44,839 in 2013, based on the World Bank’s Atlas method of measuring currency values.

All of the G7 nations—the US, Japan, Canada, Germany, France, the UK and Italy—are developed countries within FTSE’s country classification framework.

By contrast, the four nations represented in the FTSE BRIC 50 index (Brazil, Russia, India and China) had mean GNI per capita of $8,420 in 2013, over five times lower than the G7 average.

All four of these countries are members of the FTSE Emerging index (Brazil is in a subcategory of advanced emerging countries and Russia, India and China are in the secondary emerging subcategory).

But it would be a mistake to assume that high levels of relative national wealth are automatically associated with developed equity market status.

For example, Qatar and the United Arab Emirates (UAE) have levels of national income that are comparable with or higher than those of the leading developed nations (according to the World Bank, in 2013 Qatar and UAE had GNI per capita of $85,550 and $38,620, respectively).

However, these countries’ equity markets are currently some way from being classified as developed. They currently have frontier and secondary emerging status, respectively, within FTSE’s country classification framework (although Qatar is on the watchlist for possible promotion to secondary emerging status).

This perhaps surprising result reminds us of the central purpose of the classification process: to distinguish mature economies with deep, developed capital markets from other countries with relatively underdeveloped equity markets and a less evolved infrastructure for equity trading.

According to FTSE’s assessment of quality of markets, both Gulf states’ equity markets still fail to meet a range of criteria necessary for classification either as an advanced emerging or a developed market: these include the requirement to treat minority shareholders in a fair and non-prejudicial way, to allow foreign investors to invest in local companies without significant ownership restrictions, and to have a free and well-developed foreign exchange market.

That said, FTSE was the first major index provider to include the UAE in a broad emerging markets index (in September 2010). The UAE equity market has performed well relative to the FTSE Emerging index, particularly since the beginning of 2013.


Source: FTSE, data as at June 30 2014. Past performance is no guarantee of future results.


FTSE is involved in consultations with the two Gulf States’ stock exchanges and securities regulators and actively monitors the local markets’ compliance with individual quality of markets criteria, such as those concerning foreign ownership restrictions.

Countries’ relative levels of income are a good starting point for a classification of global equity markets. But to prove useful for investors, a classification process must look at a much broader range of structural features.



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