PSX sees index boost, but no foreign inflows

FTSE lifts Pakistan's weight to 10%; MSCI review expected to add new stocks

KARACHI:

Despite a notable increase in Pakistan's weightage by leading international indices providers such as Morgan Stanley Capital International (MSCI) and the Financial Times Stock Exchange (FTSE), foreign investors continue to stay away from the Pakistan Stock Exchange (PSX), reflecting persistent scepticism about the country's equity market.

According to Shankar Talreja, Director of Research at Topline Securities, while the FTSE Frontier Market Index raised Pakistan's weight to over 10% in September 2025, "but it has no practical use." They have not translated into meaningful foreign portfolio inflows. FTSE has already increased Pakistan's weightage, and it may rise further in the future once Vietnam graduates from frontier to emerging market status, he said, noting that Vietnam has presented a clear roadmap to international investors.

Pakistan's stock market, however, has performed strongly over the past year. Since securing a $3 billion Standby Arrangement (SBA) with the International Monetary Fund (IMF) in June 2023, the PSX has rallied sharply, driven largely by improving macroeconomic indicators and strong local participation. Yet, Talreja pointed out that foreign investors have been consistently selling shares in the PSX for the past six years.

"Initially, Pakistan's macroeconomic indicators were weak, which discouraged investors," he explained. "But even as the economic fundamentals have started to rebound, foreign investors have not returned." He added that most of the current market momentum is being driven by domestic investors shifting from fixed-income instruments to equities as interest rates decline.

The State Bank of Pakistan's policy rate, which had remained at a record high of 22% for over a year, has now been lowered to 11%. "With lower returns on fixed-income assets, local investors have pivoted to the stock market," Talreja said. However, he emphasised that attracting foreign participation will require continued macroeconomic stability and a decline in interest rates.

Foreign investors have reportedly offloaded nearly $250 million worth of shares since January 2025, underscoring the persistent lack of foreign confidence despite strong index performance and improved earnings across key sectors.

MSCI is scheduled to announce the results of its November 2025 index review on November 5, which will take effect from November 25. In the last review in August 2025, Pakistan's Faysal Bank was added to the MSCI Frontier Market Index.

Currently, 27 Pakistani companies are part of the MSCI Frontier Index, with a combined weight of about 5.39%. Fauji Fertiliser Company (FFC) holds the highest individual weight of 0.6%, followed by United Bank Limited (UBL) at 0.4% and Lucky Cement at 0.35%.

Topline Research expects the inclusion of Fatima Fertiliser, Askari Bank and The Bank of Punjab (BOP) in the upcoming review. Conversely, Abbott Pakistan may face exclusion due to minimum free float requirements, while Bank AL Habib may be at risk over liquidity shortfalls. However, both could be retained under MSCI's buffer rules. "We estimate Pakistan's weight in the MSCI Frontier Index at around 5.4-5.5%," Talreja said. "With potential new additions, the weight could rise by another 23 basis points. However, the chances of this having a major market impact are low."

He added that while such inclusions are theoretically positive, practically, they are unlikely to generate substantial inflows because global funds tracking frontier markets are limited. "Assuming global assets under management of around $2-3 billion tracking frontier indices, inflows to Pakistan from this review would only be around $3-5 million," Talreja noted. In a separate move, FTSE increased Pakistan's weight in its Frontier Market Index from 3.63% in August to 10.06% in September 2025, expanding the country's representation from 16 to 58 companies. However, this change also failed to spur inflows, as a few major funds currently track the FTSE Frontier Index.

Pakistan witnessed significant outflows last year when FTSE downgraded the country from the Secondary Emerging Market to the Frontier Market, triggering large-scale selling by global fund giant Vanguard. "Unless a major global fund decides to re-enter Pakistan or the PSX attracts new institutional interest, these index adjustments will remain largely symbolic," Talreja concluded.