In a major surprise, the MSCI on Friday proposed to downgrade the Pakistan Stock Exchange (PSX) to its Frontier Markets (FM) Index in November 2021 from the Emerging Markets (EM) Index.
As an immediate reaction to the potential move, local and foreign investors may resort to panic selling of shares at the Pakistan stock market and new investors may take fresh positions across the board.
“The (final) decision in this regard (the MSCI proposal) will be announced on September 7, 2021,” Arif Habib Limited Head of Research Tahir Abbas said in a commentary.
The MSCI is expected to discuss the potential reclassification with market participants by August 31, 2021.
“The reason for potential reclassification is the steady decline in market capitalisation of Pakistan’s constituents (companies listed at the PSX) since 2017, leading to ineligibility of the stock market to meet the criteria for market classification framework for the EM Index,” he said while citing the MSCI.
Moreover, the index continuity rule has been applied to MSCI Pak since November 2018 to artificially keep the MSCI Pak index in EM.
Since November 2019, none of the three companies in MSCI EM have managed to meet the emerging market classification framework.
“Due to this, the MSCI has proposed to reclassify MSCI Pak to the FM Index,” he said.
Pakistan had been upgraded to the MSCI EM Index in May 2017 after a gap of nine years.
On Friday, the benchmark KSE-100 index closed at 47,603.36 points after a loss of 359.18 points or 0.75%.
The simulated index for MSCI Pak FM would have a total of 23 companies including four mid-cap and 19 small-cap firms compared to 16 companies in MSCI Pak EM (three mid-cap and 13 small-cap), Abbas said.
The MSCI Pak FM would have a weight of 2.3% in the MSCI FM Index and 5.8% in the MSCI FM 100 Index.
The four mid-cap companies in MSCI Pak FM will include Lucky Cement, MCB Bank, HBL and Oil and Gas Development Company.
The 19 small-cap firms in MSCI Pak FM will include Pakistan Petroleum Limited, Mari Petroleum, Engro Corporation, UBL, Fauji Fertiliser Company, Pakistan Oilfields Limited, Pakistan State Oil, Hub Power Company, Indus Motor Company, Engro Fertilisers, TRG Pakistan, Bank AL Habib and Abbott Laboratories.
National Bank of Pakistan, Systems Limited, Millat Tractors, The Searle Company, Bank Alfalah and Packages Limited will also be among 19 small-cap firms.
“MSCI proposed to apply minimum size requirement for smaller FM and minimum liquidity requirement for average liquidity market (ATVR at 15%),” he said.
The market classification framework for MSCI FM is full market capitalisation of $1.17 billion, free float market capitalisation of $88 million and average liquidity market (ATVR) at 2.5% compared to MSCI EM criteria of full market capitalisation of $2.34 billion, free float market capitalisation of $1.17 billion and ATVR of 15%.