MSCI downgrades Pakistan to frontier markets
KARACHI: Index provider MSCI Inc downgraded Pakistan to a frontier market to no longer meet emerging market classification standards for size and liquidity.
“Although the Pakistani equity market meets market accessibility requirements under the classification of emerging markets, it no longer meets size and liquidity standards,” MSCI said in a statement.
The conclusion follows comments received from market participants following a recent consultation on a market reclassification proposal for the MSCI Pakistan Index.
This is the second time the index provider has downgraded Pakistan to a frontier market after being awarded emerging market status in 2017. The country was included in the MSCI Emerging Markets Index from 1994 to 2008. Pakistan will be part of the MSCI FM 100 index from May 2022., the press release said. The move was expected as Pakistan had started to fall below the MSCI criteria in terms of size and liquidity after being promoted to an emerging market in 2017. Pakistan has a 0.02% weight in the MSCI index emerging markets, according to data compiled by Bloomberg. .
Only three stocks – Lucky Cement Limited, MCB Bank Limutes and Habib Bank Limited are included in the MSCI Pakistan Index, but none of them have met the size or liquidity criteria since November 2019
Topline Securities in its report said that the MSCI EM index has three components of Pakistan, while the MSCI FM index is simulated to have four components – with OGDC (Oil and Gas Development Company) being the additional component – according to the simulation. June 2021 provided by MSCI.
He noted that the MSCI EM Small Cap Index has 13 components from Pakistan, while the MSCI FM Small Cap Index is simulated to have 19 components – with Indus Motor Company, Bank Al Habib Limited, Abbott Laboratories Pakistan, National Bank of Pakistan, Systems Limited, and Packages Limited being the additional constituents.
Starting from the SAIR in November 2021, the MSCI Pakistan Indices will be rebalanced according to the size and liquidity requirements for smaller and medium liquidity frontier markets, as described in section 5.2 of the MSCI Global Investable Market Indices methodology. . Pakistan’s weight in the MSCI FM index should have a weight of 1.9% according to data from August 2021 and 5.5% in the MSCI FM 100 index. Four years ago, when Pakistan was which became the emerging markets market in 2017, the country’s weight in the MSCI FM 100 was around 8.5%.
Past rebalancing, Topline Securities estimated the investment of passive EM funds in Pakistan at $ 125-175 million, where around $ 75-100 million would likely be invested in major emerging market stocks, while $ 50-75 million would be invested in major emerging market stocks. millions of dollars would potentially be parked in emerging small-cap markets. actions.
Analysts are expecting a likely exit of around $ 150 million with entries of $ 100 to $ 150 million.
Arif Habib Limited noted in a report that in the MSCI FM universe, “With the exception of Vietnam, the fundamentals of the KSE-100 index were relatively stronger than those of peer markets (with a higher weight) with valuations at very attractive levels ”.
Additionally, the brokerage said that after reclassification Pakistan, with an average daily trade value of $ 127 million, would be the third-most liquid market in the FM index after Vietnam ($ 776 million ) and Bangladesh ($ 167 million).
MSCI said the reclassification would be done in a single step, coinciding with the Bi-Annual Index Review (SAIR) of November 2021. Based on a simulation using pro forma data as of August 31, 2021, this would lead to the inclusion of four stocks in the MSCI Frontier Markets index with an estimated index weight of 1.90%.
The index continuity rules, as described in section 2.4 of the MSCI Global Investable Market Indexes methodology, have been applied since November 2018 SAIR to maintain the three components required in the MSCI Pakistan index. However, as of the November 2019 SAIR, no security in the MSCI Pakistan equity universe meets the emerging market size and liquidity criteria under the MSCI market classification, the statement added.