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October 12, 2018

Pakistan risks exclusion from MSCI emerging markets index


October 12, 2018

KARACHI: Morgan Stanley Capital International (MSCI) may drop Pakistan from its emerging markets index next year if its blue-chips continue to derogate from the required free-float standards, a senior analyst said on Thursday.

Analyst Nabeel Khursheed at Topline Securities said none of the existing five companies – Habib Bank Limited (HBL), Oil and Gas Development Company (OGDC), MCB, United Bank Limited (UBL) and Lucky Cement – that are part of the standard MSCI EM index meets the market cap requirement as per the Wednesday’s closing. HBL and OGDC barely meet the criteria while MCB, UBL and Luck fall far behind in meeting the requirement. “If Luck and UBL are removed from the MSCI EM Index, potential outflow is estimated at $54 to $71 million,” Khursheed added.

The analyst, citing his conversation with MSCI officials, said if at least three companies of a country, belonging to MSCI EM, do not meet the set MSCI rules, “the country’s status will be reviewed in the next annual MSCI review (May-Jun 2019) after which, investors will be allowed a year or so to adjust to the new rule”.

“However, it is unlikely that Pakistan will be removed from MSCI EM in the upcoming semi-annual review as a country’s status is usually reviewed on annual basis,” he added.

MSCI reclassified the country to emerging market index in June 2017 after keeping it on frontier markets for nine years and that was expected to attract $300 to 500 million foreign inflows from the funds tracking the index. The country’s current weight in the MSCI EM Index is estimated at 0.06 percent.

The MSCI’s upcoming semi-annual index review on November 13, which will be effective from December 3, will be based on three rules: economic development, size and liquidity requirements and market accessibility. The price cut-off for the upcoming index review will be October-end.

“For a country to be in MSCI EM index, at least three of its companies have to meet the benchmarks,” the analyst said.

MSCI’s current threshold for free float and full market capitalisation requirement is $797 million and $1.594 billion, respectively.

“However, the market cap requirement is reviewed semi-annually and we believe that the upcoming review will be based on revised market capitalisation,” Khursheed added.

“Since emerging markets are under pressure (down 15 percent in year-to-date), there is a likelihood that MSCI may revise down its market cap requirement.”

The analyst said if free float requirement is reduced by around 15 percent there is a chance that HBL, OGDC and MCB may hold the ground in MSCI EM index. The benchmark KSE 100-share Index of the Pakistan Stock Exchange has lost $19 billion in market capitalisation so far in the current calendar year, while it has been down 4.1 percent or 1,674 points on external account pressure with dollar having appreciated 21 percent against rupee during the


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