PSX may be reclassified to FM index
A total of 11 constituents from Pakistan are expected to be added to the MSCI FM 100 index. Photo: File
Pakistan Stock Exchange (PSX) is highly expected to be reclassified among lesser advanced economies in Frontier Market (FM) index by Morgan Stanley Capital International (MSCI) on Wednesday in the wake of continuous drop in share price of its listed companies for quite a long time.
PSX has remained part of MSCI’s leading Emerging Market (EM) index since May 2017 when the benchmark KSE 100 Index hit all-time high close to 53,000 points, but failed to sustain the level and never returned back to that high level since then.
Market experts, however, anticipate the MSCI’s likely decision would be a blessing in disguise for “PSX would come back into the limelight,” Arif Habib Limited Head of Research Tahir Abbas said while talking to The Express Tribune.
Initially, the PSX’s weightage (size) would be 5.8% in FM index compared to 0.02% in EM index at present, according to the MSCI working, he said. “PSX’s size has reduced to negligible level (two basis points only) in EM. Its reclassification in FM would bring it back into the spotlight.”
The MSCI’s likely decision would help in re-attracting foreign investors to the domestic bourse who have continued to exit the market for a few years now. “A larger number (90-92%) of active global investors track FM index to take decisions on investment in the stock markets around the globe,” he said.
Pakistan’s economy is on expansion mode for over a year now. It is expected to grow by 4.8% in the current fiscal year 2022 compared to 4% in FY21. It had contracted 0.5% in FY20.
The developments (growing economy and PSX reclassification in FM) should support listed companies to regain their share prices. Accordingly, “the benchmark KSE 100 index should recover to over 50,000 points level by end of December 2021,” he said.
The index closed at a two-week low level of 46,918.52 points on Monday.
Earlier, it had recovered to a four-year high close to 49,000 points in June 2021 from a five-year low of around 27,000 points in March 2020 in the wake of Covid-19 pandemic.
The market had failed to regain its record high level amid worsening of current account deficit and balance of payment issues in 2018, a prolonged delay in agreeing to the IMF loan programme in mid of 2019 and the then aggressive increase in benchmark interest rate to 13.25% between 2019 and early 2020, he said.
Earlier in June 2021, MSCI proposed to downgrade PSX into FM from EM on the development and announced to complete its consultation with market participants (including global investors) till August 31, 2021.
“The reason for potential reclassification is the steady decline in market capitalisation (share price) 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.
Read PSX falls in dull trading week
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. There must be at least three large cap stocks from a market to maintain its position in EM index.
“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.
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%.
Published in The Express Tribune, September 7th, 2021.
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