FTSE Russell retains Pakistan in secondary emerging markets

Positive outlook, economic reforms propel Pakistani equities

KARACHI:

FTSE Russell, the UK-based indexes and analytics provider, has decided to retain Pakistan in its “secondary emerging markets” for the next six months, surpassing market expectations for a downgrade. This decision has placed Pakistani equities on the watch-list for a potential downgrade, albeit with a positive outlook that anticipates increased business and economic activities. Such growth is expected to raise the market capitalisation of stocks to the level required for remaining in the secondary emerging markets.

FTSE Russell’s latest decision has empowered global passive funds—tracking FTSE decisions with assets worth $15.9 trillion—to inject new capital into undervalued Pakistani listed companies, increasing their stakes due to the bright outlook.

Pakistan’s (Pakistan Stock Exchange/PSX) market capitalisation plummeted to $21 billion last year from $100 billion in 2017 due to two primary reasons. Firstly, the Pakistani currency experienced significant devaluation against the US dollar over the past seven years, dropping from around Rs105/$ in 2017 to Rs278/$ currently. Secondly, stock prices sharply declined amidst economic turmoil and high political instability, collectively leading to the market capitalisation drop to $21 billion from the earlier $100 billion.

However, the currency has rebounded by almost 10.5% to Rs278/$ and has remained relatively stable over the past six-and-a-half months compared to the volatility observed between 2017 and 2023. The PSX has witnessed a remarkable rally since July 2023, reaching a new all-time high of over 67,200 points on Thursday from 40,000 points in June 2023, indicating a rising market capitalisation trend.

Speaking to The Express Tribune, JS Global Capital’s Head of Equity Sales, Syed Faran Rizvi, mentioned that global investors are highly optimistic about Pakistani equities, with many returning to Pakistan following the country’s attainment of political and economic stability post-February 2024 elections.

Global media reports highlighted FTSE Russell’s decision not to strip Egypt and Pakistan of their emerging-market status as a green light for passive stock funds to resume investing in these countries, which were recently at risk of defaulting on their debts.

The FTSE Russell decision follows a four-week period of positive news, including “Pakistan obtaining a stable government led by a reform-friendly prime minister and Egypt securing more than $57 billion in rescue packages—eliminating default threats and aiding their equities to outperform EM peers.”

Pakistan and Egypt have faced a dearth of foreign portfolio flows for about seven years. While they still have challenges to overcome in their economic crises, FTSE Russell’s decision offers them a potential lifeline.

Rizvi further stated that the downward trend in inflation readings and crucial energy reforms, including the discontinuation of gas pricing subsidies, are key developments that will boost economic activities in Pakistan significantly.

The decline in inflation readings is expected to prompt the central bank to make its first cut in the key interest rate, enabling businesses to resume bank borrowing and increase production. Rizvi highlighted banks and energy firms as major beneficiaries of ongoing economic reforms, suggesting investors consider stocks in these sectors along with others like fertilisers, food, and textiles.

He projected that the PSX would reach 70,000 points by the end of the current fiscal year on June 30, 2024, expressing confidence in the return of stability to the country’s economy over the next two to three years.

However, FTSE stated that if Pakistan fails to achieve the minimum investable market capitalisation and securities count exit level thresholds by the close on Friday, June 28, 2024, it would be demoted from secondary emerging to frontier market status, subject to final ratification by the FTSE Russell Index Governance Board. This potential action will coincide with the September 2024 index reviews, effective from the open on Monday, September 23, 2024. FTSE Russell plans to provide an update on Pakistan’s watch list status at the beginning of July 2024.

Published in The Express Tribune, March 29^th, 2024.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.