MSCI set to add four Pakistani firms to FM index
Morgan Stanley Capital International (MSCI) is expected to include four additional Pakistani companies in its global Frontier Market (FM) index next month, driven by a rise in their share prices. This move is likely to attract international investors, who manage multibillion-dollar portfolios and track the index for global investment decisions.
The global index and analytics provider’s decision may encourage foreign investors to increase their stakes in firms already listed on the Pakistan Stock Exchange (PSX), which was the world’s best-performing market in the previous fiscal year 2023-24. Additionally, the initiation of the next $7 billion International Monetary Fund (IMF) loan programme for Pakistan in August 2024 is expected to further boost external investment at the PSX.
Topline Research Senior Analyst Shankar Talreja, projecting based on MSCI methodology, stated, “We expect the addition of DG Khan Cement (DGKC), Sazgar Engineering (SAZEW), Faysal Bank (FABL), and Fauji Fertiliser Bin Qasim (FFBL).” Fauji Cement (FCCL) might also be included, although its free float is just 1.4% above the last review threshold. TRG (The Resource Group) Pakistan fails to meet the total market capitalisation requirement of $126 million, with its market cap ranging between $105-117 million in the last 10 working days. However, with the help of the buffer rule, this company may also remain part of the index.
MSCI is scheduled to announce its Quarterly Index Review (QIR) on August 12, 2024, and any changes in the index will be effective from September 2, 2024. In the last review of May 2024, the minimum threshold of free float for the selection of frontier market stocks was revised upward from $57 million to $63 million. Similarly, the market capitalisation threshold was revised upward from $114 million to $126 million.
The four companies projected for inclusion in the FM index meet MSCI’s criteria of enhanced free float and market capitalisation based on the last review. Both the free float and market capitalisation of these companies are above the MSCI threshold. However, any change in the threshold is not known until the results are announced for that particular review, and it is generally updated every quarter. “Any upward revision in the free float or total market threshold by MSCI may result in deviation in our estimates,” the analyst noted.
Pakistan’s weight in the FM index is likely to increase by 35-45 basis points to 4.7-4.8% from the current 4.2-4.3% following the addition of the four companies and the increase in the market cap of existing constituents by 9%. “Theoretically, due to the increase in weight by 35-45 basis points and assuming an asset under management (AUM) size of $5-10 billion tracking the MSCI FM index, we expect gross inflows of $20-45 million (post the four companies inclusion),” Talreja explained.
International investors have already begun increasing their stakes in companies operating in Pakistan and listed on the PSX in anticipation of the next IMF extended fund facility (EFF). Finance Minister Muhammad Aurangzeb recently stated that the IMF Executive Board is set to give its final approval for the loan in August 2024, following the country’s achievement of an IMF staff-level agreement last month.
The PSX benchmark KSE 100 Index reached an all-time high near 82,000 points in mid-July 2024, up from around 40,000 points in June 2023, showing outstanding growth of more than 100% over the past 13 months. The growth is based on a surge in the share prices of listed companies. However, the benchmark index closed at 78,226 points on August 2, 2024, due to profit-taking amid recent political upheaval.
Local brokerage houses anticipate the index rising to near 110,000 points by the end of the current fiscal year 2024-25, on June 30, 2025. This projection is based on the upcoming IMF programme, which has boosted foreign investors’ confidence in the domestic economy.