Morgan Stanley Capital International (MSCI) downgraded Pakistan to a frontier market on Wednesday due to the low liquidity of the main scripts included in the emerging markets index.
This is the second time that the index provider has downgraded Pakistan to a frontier market after being awarded emerging market status in 2017. The country was included in the MSCI Emerging Markets Index from 1994 to 2008.
“The Pakistani stock market meets market accessibility requirements under the classification of emerging markets, however, it no longer meets size and liquidity standards,” according to the MSCI statement.
Pakistan will be included in the MSCI FM 100 index from May 2022, the statement said. The move was expected as Pakistan had started to fall below MSCI criteria in terms of size and liquidity after being promoted to an emerging market in 2017.
“Foreign investors have sold stocks worth more than $ 1 billion since moving to an emerging market in 2017, with the benchmark KSE-100 falling 12% from its all-time high.” , according to a fund manager.
Pakistan has a 0.02% weight in the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
“Only three stocks – Lucky Cement Limited, MCB Bank Limutes and Habib Bank Limited are included in the MSCI Pakistan index, but none of them have met the criteria for size or liquidity since November 2019,” MSCI said. .
The MSCI EM index has three constituents from Pakistan, while the MSCI FM index is simulated to have four constituents – OGDC being the additional constituent, according to the MSCI statement.
Not a surprise
“The MSCI EM Small Cap Index has 13 components from Pakistan, while the MSCI FM Small Cap Index is simulated to have 19 components – with INDU, BAHL, ABOT, NBP, SYS and PKGS being the additional components”, a- he added.
Samiullah Tariq, head of research at Pakistan Kuwait Investment Company, said MSCI’s move came as no surprise to the market.
“The move is in line with expectations due to the decline in market capitalization after inclusion in the emerging markets index, Pakistan’s dollar market capitalization declined as the stock index tracked the depreciation of the currency “said Tariq. Khaleej weather Wednesday.
Beneficial for Pakistan
Market experts said that the MSCI stock will benefit Pakistan as it will have a greater presence on the MSCI Frontier Markets Index. However, an exit of funds from the market is expected as foreign investors are likely to withdraw up to $ 150 million from their KSE-100 index investment.
“Based on Pakistan’s weight of 0.02% and global emerging market liabilities under management estimated at $ 400-500 billion, we estimate the investments of EM passive funds in Pakistan at $ 125- $ 175 million. dollars, where about $ 75-100 million is likely. invested in major emerging equities while $ 50-75 million is potentially parked in emerging small-cap equities, ”the statement said.
According to the MSCI simulation, Pakistan is likely to have a weight of 1.9% in the MSCI FM index and 5.5% in the MSCI FM 100 index (at the time of the upgrade from Pakistan to MSCI FM’s EM in 2017, Pakistan’s weight in MSCI FM 100 index was around 8.5 percent).
“It is difficult to assess the flows against FM due to the lack of data availability, however, we estimate the potential investment of FM funds to be $ 100-150 million, of which $ 75-100 million. dollars maybe in the main constituents. mentioning that some of the active FM funds have invested in Pakistan even though it is classified as an ME, “the statement said.
According to a note from Topline Research, potential entries and exits remain preliminary estimates and could largely be offset.
“We believe that relocating to the frontier market of the emerging market may prove beneficial to Pakistan in terms of reduced overseas sales. Foreigners have sold shares worth $ 730 million (net) since. on December 31, 2019 and have sold shares worth $ 159 million (net) this year already. rebalancing, ”he added.