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MSCI has included Pakistan Stock Exchange in emerging-market index

By Shahid Shah
June 16, 2016

KARACHI:  Morgan Stanley Capital International (MSCI), the US equity indices provider, has included Pakistan Stock Exchange in its benchmark emerging-market index that is likely to attract multimillion dollars of portfolio investment in the Asia’s best performing market.

“The MSCI Pakistan Index will be reclassified to emerging markets status, coinciding with the May 2017 semi-annual index review,” MSCI said in its annual review meeting.  “PSX would be inducted in the EM Index in June 2017.”

MSCI said the number of Pakistan’s companies would be cut down to 27 companies, compared to 36 stocks in the frontier market index. It will include three large capital stocks, six mid cap and 19 small cap stocks. The free float adjusted market capitalization would be 16 percent lower under emerging markets. Pakistan has an average weight of 8 percent in the frontier market, which is a strong index.

Finance minister Ishaq Dar hailed MSCI decision.

“The inclusion of Pakistan in the category of ´Emerging Market´ is an indication of the confidence of the international institutions in Pakistan´s economy,” Dar said in a statement.

The MSCI document said Pakistan stocks will be having a potential weight of 0.19 percent only in the emerging market, second to the lowest 0.18 percent weight of Czech Republic. China has the largest weight of 25.41 percent in EM Index while India is the fourth largest heavyweight in the EM with 9.03 percent.

Pakistan’s potential large capitalization companies that would likely be part of the list include Oil and Gas Development Company Limited (OGDCL), Habib Bank Limited and MCB Bank Limited. Mid cap category would be formed by United Bank Limited, moved from large cap in FM to mid cap in the EM, Lucky Cement, Fauji Fertilizer Company Limited, Engro Corporation, Hubco and Pakistan State Oil.

Stocks that would form small cap in EM list include National Bank of Pakistan, Indus Motor Company, Fatima Fertilizer, Kot Addu Power Company, Fauji Cement, Dawood Hercules Corp, Packages, Pakistan Oilfields, Fauji Fertilizer Bin Qasim, Searle Pakistan, Maple Leaf Cement, Bank Al-Falah, Pak Suzuki Motor Co, Kohat Cement, Nishat Mills, Ferozesons Laboratories, IGI Insurance, Pak Elektron, and Millat Tractors.

According to the MSCI document, Pakistan Petroleum Limited, K-Electric, PTCL and few other stocks, which are part of the FM Index, will not be included in the EM index.

Zeeshan Afzal at Insight Securities said Pakistan’s benchmark index has already gained 15 percent in 2016 ahead of MSCI decision, as the inclusion in emerging market was the likely proposition.

“In dollar terms, we see $300-500 million foreign inflows from the emerging market index tracking funds while improved visibility of Pakistan market would attract other funds/investors,” Afzal said.

“Investors’ top picks should include 27 stocks mentioned in provisional list of constituents by the MSCI with prime focus towards large and mid-cap stocks which would lead in the price run-up.”

Pakistan had received emerging market status in early 90s that continued till 2008, when stock market saw the crisis and was shut down for some period, which resulted in heavy losses to the foreign investors and they sold their shares in the off market with huge discounts. This resulted in Pakistan’s expel from the EM Index in December 2008. Later, it was included in the list of Frontier Markets in May 2009.

Muhammad Affan Ismail, analyst at BMA Capital, said the decision bodes significantly well for market sentiment as Pakistan will now gain access to a large pool of foreign funds tracking EM markets.

“Major fundamental shift in Pakistan macros (CPEC program and improving energy supplies) will likely stretch the discounted valuations of Pakistani market in convergence with its EM club members,” Ismail said.

Last year, UAE and Qatar stock markets were upgraded to EM Index and they saw arrival of $400 million each in next six months of induction. FM is market of a couple billion dollars only, while EM is a market of over a trillion dollars, “So even our lower weight can bring more investment,” said Nadeem Naqvi, managing director PSX. “I can see at least $100 million to $300 million investment coming under EM after one year of our movement into the index.”