Despite MSCI review, active value-seekers to return to Pakistan

Any downgrade in market status may eventually help Pakistan win back passive investors

KARACHI: A long and agonising dry spell has played havoc with the psyche of stock market investors in Pakistan and most of them have preferred to stay on the sidelines as reflected in the lacklustre trading volumes.

While sitting at the edge of their seats eagerly looking for triggers, they are scrutinising every event through a bear market lens. Even the recent announcement by Morgan Stanley Capital International (MSCI) that it will carry out a semi-annual review for its Emerging Market (EM), Frontier Market (FM) and Developed Market (DM) indices is looked at sceptically.

The fears of domestic investors are not unfounded as the current rout in the stock market roughly kicked off after a similar review in May 2017 when the MSCI upgraded Pakistan from FM to EM category. The euphoric anticipation of joining the $1.8-trillion prestigious EM club and expectation of huge foreign inflows pushed the KSE-100 index to uncharted territories when the index touched 53,000 levels.

However later, what happened on the contrary was a huge exodus of foreign funds focusing on the FM. The negativity triggered by these huge outflows coupled with political uncertainty, widening trade deficit and rupee depreciation pushed the market into an abyss and now it is even struggling to hold the latest support level at 37,000 points.

Senior analyst Ali Asghar Poonawala at AKD Securities ruled out the possibility of Pakistan being removed immediately from the EM index in the upcoming May 2019 review, though Pakistan’s weightage has been cut to 0.03% recently from the initially assigned 0.16%.

However, there is a general fear on the street that the fate of Pakistan’s stock market hangs in the balance in the upcoming review as it may not be able to meet the key criteria set by the MSCI to avoid a downgrade back to the FM.

The minimum requirement set by the MSCI is to have at least three stocks which meet the free float-adjusted market capitalisation requirement under the large-cap category. During the recent rout in the stock market, the only three Pakistani stocks, which are listed under the MSCI EM large-cap category ie Oil and Gas Development Company (OGDC), MCB Bank and Habib Bank Limited (HBL), have underperformed the broader MSCI EM index by 12%, 9.8% and 52% respectively.

Especially, HBL witnessed a huge drop in its market capitalisation since the announcement of a penalty and may become the Achilles heel in the upcoming review.



Standard Capital Securities Head of Research Faisal Shaji is of the opinion that even the downgrade of Pakistan’s market from the EM to FM will not be a bad outcome altogether as it may restore its pre-upgrade status in the FM where it used to enjoy around 10% weightage.

Thus, this transition may eventually help Pakistan to win back all those passive portfolio investors who were forced to leave the market when Pakistan left the FM as a result of the May 2017 review.

On the flip side, OGDC, HBL and MCB Bank may come under intense pressure due to the sell-off by global investors and exchange-traded funds (ETFs) focusing on the EM.

However, despite being in the cross hairs of foreign sell-off, OGDC enjoys a sweet spot due to recovery in crude oil prices and the prospect of making a big hit at Kekra-1 exploration well.

On the other side, the rising net interest margins (NIMs) for banks due to interest rate hikes should bode well in the long run for two major banks - HBL and MCB Bank.

The fact is that Pakistan’s upgrade to the EM was purely on technical grounds where we met certain criteria of trading volumes and market capitalisation. However, perception-wise, many international fund managers still consider Pakistan part of the FM rather than the EM.

Therefore, irrespective of the outcome of the upcoming review, the active value-seekers will keep reverting back to Pakistan’s market and in case of a downgrade to the MSCI FM, the adjustment will be made in the existing MSCI FM index structure to provide Pakistan a significant weightage and passive funds will not be able to ignore the country this time.

The writer is a financial market enthusiast and attached to Pakistan stock, commodity and debt markets. He tweets @Faraz_BizWriter

 

 

Published in The Express Tribune, April 15^th, 2019.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.