Investors to return after MSCI reclassification

The Pakistan Stock Exchange (PSX), after being formally downgraded to the Morgan Stanley Capital International (MSCI) Frontier Markets (FM) Index with effect from Wednesday (today), expects foreign investors to stage a comeback considering the strong economic fundamentals and return of stability to the rupee-dollar exchange rate.

PSX had been part of the MSCI Emerging Markets (EM) Index since mid-2017. Drop in share prices and market capitalisation of PSX companies, which were part of the EM Index, below the benchmark level over a period of time caused the reclassification of the bourse.

“PSX witnessed comparatively large foreign selling of net $58.4 million on its last day in the MSCI EM Index on Tuesday, suggesting those foreign investors who work mostly in EM have exited from the local bourse,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said while talking to The Express Tribune.

Technically speaking, those global investors who track the MSCI FM Index to make investment decisions should enter PSX from Wednesday, considering shares prices are offering higher discounts compared to regional and global markets, he said.

Besides, fundamentals of Pakistan’s economy remain strong compared to the peer countries in Frontier Markets. And depreciation of the rupee against the US dollar is believed to be over now.

“The stability in domestic currency is the most important factor to attract foreign investment to the local bourse,” he said.

The resumption of IMF loan programme worth $6 billion for Pakistan will further improve the investment scenario for foreign investors.

“Historical evidence suggests Pakistan’s economy and its currency perform well when we are under an IMF loan programme,” he underlined.

The currency was moving around Rs175-176 against the US dollar these days, Abbas said and added “there is no room left for further depreciation as of now.”

The foreign investors who track the MSCI FM Index managed an investment of $15 billion in stock markets around the globe, he said.

He highlighted that PSX stood as the third largest liquid market in the FM index after Vietnam and Bangladesh, meaning investors (both foreign and local) would trade shares worth more than many other markets in the index.

“This flexibility offers an opportunity to investors to enter and exit the market anytime,” he added.

The investment by foreigners in local stocks has dropped to one-fourth at $2.1 billion compared to the record high of $8.7 billion in December 2016.

Importantly, the foreigners hold free-float shares (available for trade at PSX) worth only $500-600 million at present compared to billions of dollars in 2016.

Published in The Express Tribune, December 1^st, 2021.

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