Emerging market status to attract $800 million in one year: analysts

PSX upgraded to MSCI EM Index

KARACHI: The upgrade of Pakistan Stock Exchange (PSX) to the emerging market index of the Morgan Stanley Capital International (MSCI) is likely to bring in $600 to $800 million within one year of the reclassification.    The MSCI, in a late Wednesday night announcement, upgraded the PSX to its EM Index from the Frontier Market (FM) Index.

“The MSCI Pakistan Index will be reclassified to Emerging Markets status, coinciding with the May 2017 Semi-Annual Index Review,” the statement read. “PSX would be inducted in the EM Index in June 2017.”

Equity analysts are expecting approximately $800 million in foreign inflows on the back of this development.

“The inclusion of Pakistan in the emerging market index will provide much needed impetus to the local equities as the country is likely to witness healthy foreign inflows to the tune of $300 to 400 million in the medium-term,” said Taurus Research in its report.

Analyst Shahbaz Ashraf at Arif Habib Limited said this graduation should bring in net flows of $600 to $700 million in a span of one year.

Analyst Saad Hashemy at Topline Securities said the market is likely to attract $600 million from EM passive funds.

“Though Pakistan’s weight in EM is much smaller, funds tracking EM ($1.4-1.7 trillion) are much larger than funds tracking FM ($17-20 billion),” Hashemy said. “The improving macroeconomic indicators and upside from China Pakistan Economic Corridor will prove to be compelling story in EM universe. This should attract investors despite.”

He, however, cautioned that the country has to sustain the overall economic recovery along with quality listings of large float companies.

He said the country showed significant improvement in terms of liquidity and market size during the last few years.

The country has nine percent weight in MSCI FM Index and 9.7 percent in MSCI FM Small Cap Index.

As per the latest reclassification, the country’s weight in MSCI EM will be 0.2 percent.

Pakistan will be amongst one of the smallest country in MSCI EM along with Egypt and Czech Republic, which are also 0.2 percent.

The country had enjoyed the emerging market status between 1994 and 2007. However, the price floor of 2008 caused its expulsion and the country was demoted to the frontier market position only in 2009.

Now, the modern rules guarantee that there won’t be any knee-jerk reaction that leads to the market closure.

Currently, the PSX’s benchmark 100-share Index is trading at a price-to-earning (P/E) ratio of 9.5x with a healthy dividend yield of 5.7 percent as against the regional market average P/E of 14x and dividend yield of two percent.  “With likely re-rating, we expect the index to reach new heights in the coming periods,” Hashemy said.

Markets of Qatar and United Arab Emirates surged around 40 percent within one year of their reclassifications to EM. Their P/E improved from 10.8x and 10.2x to 17.1x and 15.2x, respectively.

In Asian FM, Pakistan was part of Sri Lanka, Bangladesh and Vietnam. Now, in Asian EM, Pakistan will be part of eight other countries, including China, Korea, Taiwan, India and Malaysia.

The simulated MSCI Pakistan Investible Market Index has 27 companies. The MSCI EM will include Oil and Gas Development, Habib Bank, MCB Bank, United Bank, Lucky Cement, Fauji Fertilizer, Engro Corporation, Hub-Power Co and Pakistan State Oil Co.

Analyst Syed Atif Zafar at JS Research expects a strong run-up in the nine large and mid-cap stocks.