MSCI downgrades Pakistan to FM

Decision will come into effect on Dec 1; experts expect renewed interest in stocks


Salman Siddiqui September 09, 2021
In June 2021, MSCI proposed that PSX should be downgraded to Frontier Markets from Emerging Markets considering downturn in share prices (market capitalisation). PHOTO: FILE

KARACHI:

In line with market expectations, Morgan Stanley Capital International (MSCI) announced early on Wednesday that it would place Pakistan Stock Exchange (PSX) among lesser advanced economies in the Frontier Markets Index with effect from December 1, 2021.

Pakistan’s bourse had been in the MSCI Emerging Markets Index since May 2017, when the benchmark KSE-100 index hit an all-time high of 53,000 points, but it failed to stay at high levels.

Apparently, the stock market has largely factored in the MSCI’s fresh decision as investors have continued to sell stocks for the past few days.

The MSCI’s move to downgrade Pakistan to Frontier Markets from Emerging Markets stands “negative-to-neutral” for investors. They (foreign and domestic investors) may dump stocks in an immediate response to the decision and cherry-pick shares later at lower prices.

The KSE-100 index dropped 188.56 points, or 0.4%, and closed at a two-week low of 46,730 points on Tuesday. It fell further on Wednesday and shed 333.25 points, or 0.71%, to settle at 46,396.71.

Experts, however, believe the MSCI’s decision is a blessing in disguise as it will once again spark investors’ interest in the PSX with its 1.9% weight in Frontier Markets compared to a weight of just two basis points in Emerging Markets.

“The comparatively higher weight in FM will make the PSX attractive in the eyes of global investors compared to its negligible size in EM,” Arif Habib Limited Head of Research Tahir Abbas said.

Oil and Gas Development Company (OGDC), Lucky Cement, MCB Bank and Habib Bank Limited (HBL) are the four companies from the PSX which have qualified for inclusion in the Frontier Markets Index.

They would have a cumulative weight of 1.9% in the index as per their closing share price on August 31, 2021, Aba Ali Habib Securities Research Analyst Zubair Jatoi said in a short commentary.

The size of PSX may grow in Frontier Markets as Pakistan’s economy has been on an expansion mode for over a year now. The economy is expected to grow 4.8% in current fiscal year 2021-22 compared to 4% in FY21. It had contracted 0.5% in FY20.

“Last time, the PSX had a weight of over 9% in the FM Index (from 2008 to 2017),” Abbas recalled.

Barring Vietnam, Pakistan has stronger economic fundamentals compared to the peer economies like Kazakhstan, Kenya and Bangladesh in Frontier Markets. Better fundamentals coupled with expansion in the economy would help inflate the size of PSX in the index, he said.

The MSCI decision would help attract foreign investors again to the Pakistan bourse, who have continued to exit the market for the past few years.

“A large number (90-92%) of active global investors track the FM index to take decision on investment in stock markets around the globe,” he said.

The new developments (growing economy and the PSX reclassification) should support listed companies to recover from the loss in their share prices. Accordingly, “the benchmark KSE-100 index should recover and go above 50,000 points by the end of December 2021,” Abbas said.

Earlier, it rose to a four-year high of nearly 49,000 points in June 2021 from a five-year low of around 27,000 points in March 2020 in the wake of the Covid-19 pandemic.

In June 2021, MSCI proposed that the PSX should be downgraded to Frontier Markets from Emerging Markets considering the downturn in share prices (market capitalisation) at the bourse since 2017 and completed consultation with market participants (including global investors) till August 31, 2021.

“This conclusion follows feedback received from market participants from its recent consultation on a market reclassification proposal for the MSCI Pakistan Index,” MSCI said in a statement in the early hours of Wednesday.

“MSCI will reclassify the MSCI Pakistan Indexes from Emerging Markets to Frontier Markets in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR).”

It is scheduled to hold the semi-annual review on November 11, 2021 while the review decision will come into effect on December 1, 2021, according to an announcement made by MSCI on August 11, 2021.

“Based on a simulation using pro forma data as of August 31, 2021, this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.9%,” it said.

Although Pakistan’s equity market meets the requirements for market accessibility under the classification framework for Emerging Markets, it no longer meets the standards for size and liquidity.

More specifically, the index continuity rules have been applied since the November 2018 Semi-Annual Index Review to maintain the required three constituents in the MSCI Pakistan Index, it said.

“Since the November 2019 SAIR, there have been no securities in the MSCI Pakistan equity universe that meet the Emerging Markets size and liquidity criteria within the MSCI market classification framework.”

Published in The Express Tribune, September 9th, 2021.

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