At the time of the announcement, BlackRock had total assets invested directly in the Frontier Markets of approximately $420 million. Of that, about $40 million was invested directly in Bucharest Stock Exchange (BVB) issuers. Romanian stocks, which are generally more liquid than other issuers included in the index, became unintended victims of the situation in the rest of the Frontier markets. Eleven Romanian companies lost access to this passive flow as a result. The ETF sold, starting mid-June 2024, $11 million worth of Banca Transilvania, $10 million of Hidroelectrica, $8 million of OMV Petrom and eight other key Romanian blue-chips that were included in the MSCI Romania indices. Despite the aggressive sell-off, the Bucharest Stock Exchange has ensured good liquidity and strong demand, as the key index of BVB, BET, continued to rise during this period.

So, what is next? Romania has been part of the MSCI Frontier universe for a while; however, the real target is the upgrade by MSCI to the Emerging Market status. Since September 2020, Romania has been considered an Emerging Market by another indices provider, FTSE Russell. Romania started with 2 companies included in the FTSE Emerging Market – Banca Transilvania and Nuclearelectrica. Today, after the most recent addition of AROBS Transilvania Software and Electrica to the index effective March 2024, Romania has 15 companies in FTSE indices dedicated to emerging markets.

The MSCI upgrade, however, can have an even bigger impact than the FTSE upgrade since the MSCI classification holds considerable weight due to its extensive following by global institutional investors. According to Bloomberg data, MSCI Emerging indices are tracked by funds having $64 billion in assets under management. This value underlines the substantial increase in capital flow that can be directed towards the Romanian capital market once it is reclassified as emerging. According to InterCapital estimates, with just three companies included in the MSCI Emerging index, the Romanian market could witness a capital inflow of $210 million.

There is, without a doubt, a higher demand for Emerging stocks, which naturally results in higher prices in those markets. Currently, investors are paying 15.6 times earnings (P/E) for stocks in Emerging markets (MSCI Emerging Index), a price one-third higher than that in Frontier markets (MSCI Frontier Index, P/E 11.5x).

Romania eagerly awaits the MSCI reclassification, especially since it already meets the most stringent criteria. Of the minimum three, five Romanian companies already meet the size requirement. The remaining criterion is liquidity, which only Hidroelectrica satisfies. However, OMV Petrom (SNP) and Romgaz (SNG) need their average daily trading volume to increase by "only" about 15% to meet the minimum. This is possible, especially with the growing interest from Romanians themselves, who invest directly or through local ETFs, including InterCapital's, as well as from foreigners, some of whom are already taking positions in anticipation of MSCI's decision. Banca Transilvania isn't far off - it needs a 23% increase - while BRD Bank is still about 40% away from the minimum.

Emerging market status could open Romania to a significant new passive flow and new active investors. Historically, countries upgraded by MSCI to Emerging Market status have experienced significant positive effects on their equity markets, particularly in the year leading up to the announcement. This trend, excluding Argentina's unique situation, underscores the positive market sentiment and investor confidence that precedes such reclassifications. Examples include Qatar, the United Arab Emirates, Pakistan, Saudi Arabia, and Kuwait, which saw their equity returns increase substantially until MSCI's reclassification announcement.

The evolution of markets following their reclassification by MSCI from Frontier to Emerging status offers good insight into the potential trajectory for Romania post-upgrade. Each country undergoing this transition has experienced unique but generally positive market developments, highlighting the diverse impacts of reclassification. Qatar was reclassified on June 11, 2013, and saw a +14% equity return up to that date within 12 months. United Arab Emirates (UAE), reclassified alongside Qatar, experienced a remarkable +60% equity return. The UAE's market evolution post-upgrade was marked by increased global investor interest, contributing to the maturation of its capital markets and diversification of its investment landscape.

Pakistan's reclassification on May 15, 2017, led to a +45% equity return. The country's stock market witnessed improved market efficiency and investor perception, though it faced economic stability and policy consistency challenges. Saudi Arabia, reclassified on June 21, 2018, experienced a +13% equity return. The reclassification was a crucial part of Saudi Arabia's broader economic reform plan, attracting foreign capital and enhancing the depth and efficiency of its stock market. Kuwait's market, upgraded on December 18, 2019, enjoyed a +31% equity return. Kuwait's reclassification boosted investor confidence and was anticipated to further integrate its market with the global financial system, promoting liquidity and investment diversity.

The only country that didn't see a positive evolution prior to the announcement was Argentina, which saw a -18% decline by the time of its reclassification on June 21, 2018, primarily due to country-specific economic issues. This highlights the importance of macroeconomic stability in maximizing the benefits of emerging market status.

The anticipation and eventual confirmation of Romania's upgrade to Emerging Market status by MSCI could usher in a wave of foreign investment, mirroring the pre-announcement surges seen in other markets. This prospect is especially attractive for investors seeking growth opportunities in emerging markets.

In this context, the market can expect the emergence of new Exchange-Traded Funds (ETFs) and increased asset allocations towards Romania, significantly overpassing what BlackRock had invested, thus marking a new era for the local capital market. ETFs are crucial for capital markets because they offer diversified exposure to a broad array of assets, industries, or geographic regions within a single investment. They are instrumental in enhancing liquidity, providing transparency, and facilitating easier market access for investors.