Pakistan averts downgrade to MSCI FM

Keeps emerging market status following signs of economic recovery

Salman Siddiqui November 09, 2019

KARACHI: Pakistan has successfully averted chances of being downgraded to the MSCI Frontier Market (FM) Index and remained in the MSCI Emerging Market (EM) Index as the national economy and stock market have exhibited visible signs of stability.

“The MSCI decision is a positive sign for the Pakistan Stock Exchange (PSX),” BMA Capital Research Executive Director Saad Hashmi told The Express Tribune.

Foreign investors having an estimated $1.5-2 trillion in hand track the MSCI Emerging Market (EM) Index to decide whether to invest or divest in the stock markets that are part of the index.

Pakistan could have been downgraded to the MSCI FM Index as two out of its three stocks in the EM Index had fallen short of the set criteria of minimum free-float market capitalisation and/or minimum total market capitalisation.

Pakistan sustains upgraded status in MSCI Emerging Market Index

The two stocks at risk were MCB Bank (MCB) and Habib Bank Limited (HBL). The third Pakistani stock in the EM Index was Oil and Gas Development Company (OGDC).

However, “the continuity rule of the MSCI (which relaxes the criteria for the time being) helped Pakistan remain in the upgraded status of the MSCI EM Index,” Hashmi said.

MSCI has kept a close watch on economic developments in Pakistan. There are visible signs of stability in the domestic economy while the stock market has also maintained an uptrend in the recent past. This may have led the MSCI to allow Islamabad to remain in the upgraded status, he said.

All the three Pakistani stocks - OGDC, MCB Bank and HBL - continued to remain part of the MSCI Global Standard Indexes, according to the Geneva-based firm’s November 2019 Semi-Annual Index Review results announced on Friday.

The PSX’s benchmark KSE 100-share Index has recovered a net 6% or 2,078 points to 35,978 points from the three-year low of 33,900 points hit a day before the MSCI held its previous semi-annual review in mid-May 2019.

The MSCI’s “buffer rule” allows countries to keep their upgraded status in the Developed Market (DM) or EM Index.

There are around 1,100 stocks listed in the MSCI EM Index from 26 countries in five regions.

“Pakistan has maintained its weight of around three basis points in the MSCI EM Index,” Arif Habib Limited Head of Research Samiullah Tariq said in post-MSCI review comments.

The country’s weight stood at around 7-8 basis points at the time of reclassification in the index back in May 2017. However, selling pressure at the PSX caused the drop.

“Overall, the review is neutral for the market performance,” he said.

Market watch: KSE-100 rises in wake of MSCI review

The three stocks invited extensive buying at increasing prices at the PSX, however, trading volumes in the stocks remained moderate.

Three stocks deleted

However, MSCI Inc - a leading provider of research-based indices and analytics globally - has deleted three Pakistani stocks from the MSCI Global Small Cap Index, which were DG Khan Cement, Kot Addu Power Company and Thal Limited.

The changes would take place at the close of November 26, 2019, it announced. The deletion may cause some foreign selling pressure in the three stocks.

After the three deletions, 16 Pakistani companies were left in the MSCI Global Small Cap Index which included Bank Alfalah, Engro Corporation, Engro Fertilisers, Fauji Fertiliser Company, Hub Power Company, Indus Motor, Lucky Cement, Millat Tractors, National Bank of Pakistan, Nishat Mills, Packages Limited, Pakistan Oilfields Limited, Pakistan State Oil, Sui Northern Gas Pipelines, The Searle and United Bank Limited.

Pakistan was reclassified into the MSCI EM Index from the FM Index in May 2017 after a gap of nine years. Earlier, the country was downgraded to the FM Index in 2008 after the PSX (previously known as Karachi Stock Exchange) virtually suspended trading for quite a long period to avoid harsh selling.

Published in The Express Tribune, November 9th, 2019.

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