While Pakistan has been out of the MSCI Emerging Markets Index since December 2008, its exclusion has been particularly painful for Pakistani stock analysts for the last year and a half.
Despite a rise of over 100% in the benchmark index of the Karachi Stock Exchange since the start of 2012, Pakistan failed yet again in getting a mention in the latest annual re-classification review of the MSCI that the provider of global benchmark indices for equity investments announced on June 11.
The MSCI’s decision not to elevate Pakistan from the Frontier Markets Index to the Emerging Markets Index surprised many stock analysts, who were anticipating an upgrade based on the country’s improved liquidity and strong net foreign inflows amounting to $399 million year-to-date.
Good news ahead?
The MSCI has decided that Qatar and the United Arab Emirates (UAE), whose current weights in the MSCI Frontier Markets Index are 15.3% and 11.9% respectively, will be part of the MSCI Emerging Markets Index effective May 2014. Pakistan’s weight in the MSCI Frontier Markets Index is 4.4%.
According to Raza Jafri of AKD Securities, the remaining constituents in the MSCI Frontier Markets Index will likely witness an increase in their weights considering the combined weight for Qatar and the UAE. He estimates that Pakistan’s weight in the MSCI Frontier Market Index may increase up to 7%.
However the MSCI relegated Morocco from its Emerging Markets Index to the Frontier Markets Index as well. Morocco’s reclassification will take effect in November, approximately six months prior to Qatar and the UAE leaving the Frontier Markets Index.
“Since Morocco will be added earlier than the UAE’s and Qatar’s upgrade, Pakistan’s weight will first experience some dilution and then increase after six months,” wrote Shagufta Irshad Khurram, analyst and KASB Securities, a brokerage house, in a research note to clients.
Qualitative and quantitative
There are at least 17 criterions against which the MSCI measures market accessibility in a given country before categorising it in the Frontier, Emerging or Developed Market segments. Some of these criteria include foreign exchange liberalisation, capital flow restriction level, clearing and settlement, and foreign ownership limit level.
According to the MSCI’s Accessibility Review 2013, Pakistan meets 10 of these criteria. The MSCI sees no major issues in these with some room for improvement on four counts. But there are three criteria, namely stock lending, short selling, and stability of institutional framework, where the MSCI says improvements are needed.
According to Jafri, a case may be made for elevating Pakistan to the Emerging Markets Index going forward, as Pakistani companies meet the ‘quantitative criteria’ for an upgrade. The quantitative criteria include, but are not limited to, an equity market with at least four companies with market capitalisation of $1.01 billion and a free-float market capitalisation of $505 million.
“While Pakistan has not yet been considered for review for a potential upgrade to the Emerging Markets status, we believe the case for an upgrade will only become stronger going forward,” he said.
Published in The Express Tribune, June 14th, 2013.
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