MSCI downgrades Pakistan to frontier markets

KARACHI: Index provider MSCI Inc has downgraded Pakistan to a frontier market for no longer meeting the emerging market’s classification standards for size and liquidity.

“Although the Pakistani equity market meets the requirements for market accessibility under the classification framework for emerging markets, it no longer meets the standards for size and liquidity,” MSCI said in a statement.

The conclusion followed feedback received from market participants from recent consultation on a market reclassification proposal for the MSCI Pakistan Index.

This is the second time the index provider downgraded Pakistan to a frontier market after awarding emerging market status in 2017. The country was part of the MSCI emerging market index from 1994 until 2008. Pakistan will become part of the MSCI FM 100 Index from May 2022, the statement said. The decision was expected as Pakistan had started falling below the MSCI’s criteria in terms of size and liquidity after it was promoted to an emerging market in 2017. Pakistan has a weight of 0.02 percent in the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

Only three stocks - Lucky Cement Limited, MCB Bank Limutes and Habib Bank Limited are included in the MSCI Pakistan Index, but none of them has met the size or liquidity criteria since November 2019

Topline Securities in its report said the MSCI EM Index has three constituents from Pakistan, whereas MSCI FM Index is simulated to have four constituents – with OGDC (Oil and Gas Development Company) being the additional constituent – as per June 2021 simulation provided by MSCI.

It noted that the MSCI EM Small Cap Index has 13 constituents from Pakistan, whereas MSCI FM Small Cap Index is simulated to have 19 constituents – with Indus Motor Company, Bank Al Habib Limited, Abbott Laboratories Pakistan, National Bank of Pakistan, Systems Limited, and Packages Limited being the additional constituents.

Starting with the November 2021 SAIR, the MSCI Pakistan Indexes will be rebalanced using size and liquidity requirements for smaller, average liquidity frontier markets as described in section 5.2 of the MSCI global investable market indexes methodology. Pakistan’s weight in the MSCI FM index is likely to have a weight of 1.9 percent as per August 2021 data, and 5.5 percent in the MSCI FM 100 index. Four years ago, when Pakistan was upgraded to the EM market in 2017, the country’s weight in MSCI FM 100 was around 8.5 percent.

Past rebalancing, Topline Securities estimated investment of passive EM funds in Pakistan to the tune of $125-175 million, where around $75-100 million would likely be invested in main EM stocks, while $50-75 million would potentially be parked in small cap EM stocks.

Analysts expect likely outflow of around $150 million with inflows of $100-150 million.

Arif Habib Limited in a report highlighted that in the MSCI FM universe, “barring Vietnam, the fundamentals of the KSE-100 index were relatively stronger than those of peer markets (with a higher weight) with valuations at very enticing levels”.

Further, the brokerage said that post-reclassification, Pakistan, with an average daily value trading of $127 million, would be the third most liquid market in the FM index following Vietnam ($776 million) and Bangladesh ($167 million).

MSCI said the reclassification would be done in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR). Based on a simulation using pro forma data as of August 31, 2021, this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.90 percent.

Index continuity rules, as described in section 2.4 of MSCI Global Investable Market Indexes Methodology, have been applied since November 2018 SAIR to maintain the required three constituents in the MSCI Pakistan Index. However, since the November 2019 SAIR, there have been no securities in the MSCI Pakistan equity universe that meet the emerging markets size and liquidity criteria within the MSCI market classification framework, the statement added.