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PSX risks losing emerging market status


May 1, 2020

KARACHI: Pakistan yet again risks losing emerging market status in the upcoming semi-annual index review by Morgan Stanley Capital International (MSCI) as all the three key blue-chips of the country’s stock exchange seem to have deviated from the free-float standards, an analyst said on Thursday.

Atif Zafar, an analyst at Topline Research said all the three constituents from Pakistan – OGDC, MCB and HBL – do not meet the minimum free-float capitalisation criteria of $776 million, though OGDC only meets the full market capitalisation criteria of $1.551 billion. Of the three constituents, OGDC and MCB meet the MSCI’s buffer rule of two-third of full market capitalisation.

“We expect Pakistan to once again come under scrutiny in the review for a potential downgrade from emerging markets to frontier markets, with its weight estimated at 0.05 percent,” said Zafar.

“We believe the probability of a downgrade of Pakistan is low given that MSCI may apply the index continuity rule and take into consideration the impact of Covid-19.”

MSCI is expected to announce its semi-annual index review on May 12, 2020, which will be effective from June 1, 2020. It retained the country’s three key blue chips as the index’s constituents in the quarterly review in February.

In May last year, the country also saved its skin from a potential downgrade to frontier from emerging markets despite odds. MSCI reclassified the country to emerging market index in June 2017 after keeping it on frontier markets for nine years.

The index, earlier this month, said it would follow its global investable market indexes methodology.

However, it said it would monitor market conditions in the coming weeks and consider postponing or canceling the May review only if warranted by extreme market conditions.

The index continuity rule would be applied if anyone of the existing three stocks falls below the two-third requirement of full market capitalisation.

“The largest securities by free float capitalisation among the securities included in MSCI Pakistan’s market investable equity universe – 19 securities – will be added to the standard index in order to reach the minimum three constituents,” said Zafar. “This could potentially result in Engro replacing HBL in the Index.

Pakistan’s stock market saw robust growth over the years in terms of its market capitalisation, which was around Rs8 trillion on January 30, 2020, but as a result of global downturn due to coronavirus pandemic, it fell to around Rs5.7 trillion as of April 1, 2020.

“This has led to uncertainty and pessimism surrounding Pakistan’s national economic indicators,” PSX said in a document. “The first half of fiscal 2020 showed some clear signs of a path towards economic recovery, however, considering the existing situation the journey towards sustainable long-term growth is expected to take time.”