MSCI reclassifies Pakistan as emerging market; surge in foreign inflows expected 

KARACHI:  Index provider MSCI reclassified Pakistan as an emerging market from frontier market status and added six securties in its main board and 27 securities in small-cap index.

US-based Morgan Stanley Capital International - MSCI reclassified the country as an emerging market after keeping it on frontier markets for the past nine years.  “As a reminder, MSCI will reclassify the MSCI Pakistan Indexes from Frontier Markets to Emerging Markets at the May 2017 Semi-Annual Index Review,” it said in a statement issued late Monday. “The MSCI Pakistan Indexes will fully converge with the MSCI Provisional Pakistan Indexes, effective June 1, 2017.”

MSCI further said there will be no additions to and ten deletions from the MSCI Pakistan Index. “There will be eleven additions to and six deletions from the MSCI Pakistan Small Cap Index.”

Six companies, namely Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development and United Bank, will be part of MSCI EM main board, while 27 companies, including DG Khan Cement, International Steel, Engro Fertilizer, Sui Northern, Thal Limited, Shell Pakistan, Honda Cars and National Refinery will be part of small-cap index, according to the latest decision.

MSCI Pakistan Index will have a pro forma weight of 0.10 percent compared to earlier expectation of 0.15-0.18 percent. Final weights would be determined on the closing rates of May 31.

The country remained part of the MSCI EM Index for 14 years, between 1994 and 2008, but due to unfavorable decisions leading to investors exit resulted in the demotion of the stock market to the MSCI standalone index first, followed by its inclusion in the MSCI frontier markets, one notch below EMs.

Atif Zafar, an analyst at JS Global said since the announcement of the upgrade in June 2016, the benchmark 100-share Index of Pakistan Stock Exchange rallied 42 percent.

“Despite the upgrade, foreign investors remained major sellers in the market with net outflows of $339 million in 2016 and $223 million during 2017 so far,” he added. “With MSCI upgrade, pick-up in foreign inflows is likely to lift the sentiments of the market.”

Mohammad Sohail, chief executive officer at Topline Securities said the country showed significant improvement during the last few years and met all quantitative and qualitative criteria for up-gradation, including size and liquidity.

Analyst Shahab Farooq at Elixir Securities said passive flows of approximately $300 million are expected. “However, taking cues from recent inclusion in the FTSE (the Financial Times Stock Exchange) indices, muted net flows in the near-term may be witnessed as global portfolio managers realign their portfolios.”

The KSE 100-share Index rallied 45.6 percent to become Asia’s best performing market in 2016. Moreover, it also remained number one in the MSCI FM Index. Analysts said strong cash liquidity because of soft interest rate and rising investor confidence mainly caused strong performance, while economic recovery, rebound in oil prices and better security situation also provided support.