Is bourse on way to MSCI EM status?

As key firms cross thresholds, time is ripe to pitch Pakistan as emerging market

KARACHI:

Pakistan Stock Exchange (PSX) is gaining significant attention these days from investors, analysts, critics, policymakers, and onlookers alike.

While pessimists continue to dismiss the rally as speculative, conspiracy-driven, and manipulated by a few big players serving particular vested interests, those who look deeper understand the financial reasons behind the uptick; despite the ascent being rapid and steep.

One potential impact of this rally, which will soon be heavily discussed, is Pakistan's potential entry into the MSCI Emerging Market Index.

MSCI is a global provider of investment-related analytics and tools for global capital allocators to make sound investment decisions. Among its indices, or lists of top companies based on certain qualitative and quantitative methodologies, the three most prominent are the MSCI Developed Market, MSCI Emerging Market, and MSCI Frontier Market.

Pakistan's history has oscillated between being part of the MSCI Emerging Market and MSCI Frontier Market.

To give some background: despite global negativity and pessimism, Pakistan remained part of the MSCI Emerging Market Index for 13 years, from 1994 to 2007, but was removed in 2008 due to unfortunate decisions involving capital controls and an excessive leverage-driven collapse in equity markets coinciding with political crises.

In 2017, Pakistan qualified again for the prestigious Emerging Market status, only to be removed four years later, in 2021, due to excessive currency depreciation and monetary tightening, which led to a decrease in the USD valuation of companies. Coincidentally, the downgrade was again coupled with extreme political uncertainty, which shook investor confidence.

Today, Pakistan is closer than ever to potentially being reclassified within the MSCI Emerging Market Index. Such classifications are determined during the MSCI Annual Market Classification Review, which evaluates performance based on several qualitative and quantitative factors.

According to the MSCI Market Classification Framework, Pakistan needs to have three companies with a market capitalisation of $1,260 million and a free float-based market capitalisation of $630 million, along with a 15% annualised traded value ratio (ATVR).

In simpler terms, this week, Pakistan's three blue-chip companies – Fauji Fertiliser, Mari Petroleum, and United Bank Limited (UBL) – have crossed the required threshold of $630 million in free float-based market capitalisation, demonstrating values of $1 billion, $650 million, and $665 million, respectively.

Additionally, eight companies – Oil and Gas Development Company Limited (OGDCL), Mari Petroleum, Pakistan Petroleum, Fauji Fertiliser, UBL, Meezan Bank, Colgate Palmolive, and Lucky Cement – have crossed the market capitalisation threshold of $1,260 million, demonstrating values of $3.3 billion, $3.2 billion, $1.9 billion, $1.8 billion, $1.5 billion, $1.5 billion, $1.3 billion, and $1.3 billion, respectively.

What is needed now is to ensure that at least three companies maintain these quantitative criteria and reflect a 15% annualised traded value by trading more frequently on the index for MSCI to consider Pakistan's upgrade case; either in six months or 1.5 years (by mid-2025).

The groundwork is already laid, as Pakistan, on a qualitative basis, also seems to have avoided a downgrade by refraining from imposing capital controls on foreign investors, demonstrating an efficient operational framework, and reflecting a stable institutional framework.

Of course, the index provider will hold detailed consultations with stakeholders to evaluate Pakistan's case. However, the time is ripe for policymakers to pitch Pakistan as an emerging market once again.

For those investing in PSX, it is essential to focus on underlying profitability forecasts, macroeconomic trends, individual risk profiles, alternative asset classes, and thematic plays within sectors, rather than taking a cynical view of capital allocation. A thorough research is critical before deploying hard-earned capital.

For Pakistani policymakers, the sharp improvement in business and investor confidence, driven by current political and economic stability and a reversal in interest rates, has led mutual funds to invest $200 million in the current fiscal year (in less than six months).

An upgrade or moral validation from Frontier Market to Emerging Market status would be the right kind of news to attract foreign investment. This would also help end the government's role in businesses, avoid the politics of doom and naysaying, and focus collective efforts on ensuring the rally continues – not just in the PSX but in the lives of common citizens.

THE WRITER IS AN INDEPENDENT ECONOMIC ANALYST