MSCI excludes two blue-chips from emerging market index

KARACHI: Morgan Stanley Capital International (MSCI) excluded Pakistan’s two blue-chips from its emerging market index on deviation from free-float standards, bringing the country’s tally down to three companies and fuelling foreign sell-off risks, analysts said on Wednesday.

Global index provider MSCI announced the decision of its semi-annual review last on Tuesday in which it removed United Bank and Lucky Cement from MSCI Global Standard Index Pakistan.

MSCI also demoted Maple Leaf Cement and Honda Atlas from Small Cap Index. All changes will be implemented from the close of November 30.

Analyst Nabeel Khursheed at Topline Securities said the country’s weight in MSCI Emerging Market index, after the exclusion, is likely to fall to 0.037 percent from 0.075 percent in May semi-annual review and 0.055 percent on closing of October 23.

“We believe that removal of UBL and Lucky Cement from MSCI Global Standard Index Pakistan was due to decline in market capitalisation, falling below two-third of MSCI’s set criteria for free float and full market capitalisation,” Khursheed added.

None of the existing five companies – Habib Bank Limited, Oil and Gas Development Company, MCB, UBL and Lucky Cement – that were part of the standard MSCI EM index met the market cap requirement till earlier last month.

MCB was perhaps on the edge, while UBL and Luck fell far behind in meeting the requirement.

Luck Cement was down 21 percent from January till October 23. Free float and full market capitalisation fell 35 and 65 percent to $393 million and $983 million, respectively.

UBL was down 28 percent during the period. Its free-float and full market capitalisation were down 40 percent and 60 percent.

The benchmark KSE 100-share Index, during the same period, lost market capitalisation of $20 billion, down 6.8 percent in rupee terms and 23 percent in dollars terms on the back of pressure on external account.

Samiullah Tariq, Director Research at Arif Habib expected a drop of Pakistan’s weight

to 0.040 percent from 0.066 percent.

“UBL might see foreign selling of $20 million and Lucky Cement $22 million,” Tariq said.

Khursheed sees $49 to 65 million of capital outflows with removal of Lucky Cement and UBL.

“However, their addition to MSCI Global Small Cap Index may result in some inflows.”

Yet, Pakistan still manages to retain its spot in emerging market classification.

“MSCI requires at least three companies to be included in the emerging market index for a country to be qualified as emerging market, which means that potential removal of HBL will open the chapter of a complete downgrade of Pakistan to frontier markets,” Hamad Aslam, director Research at Elixir Securities said.

“While we disregarded the market misconception that Pakistan may be completely downgraded from emerging to frontier markets via this review, we highlight that the next semi-annual review due in May-19 will be a key event to watch out for.”

Khursheed agreed that a country is removed from MSCI EM if at least three of its companies do not meet the set MSCI benchmarks.