KARACHI: MSCI has started consultation on market reclassification proposal for the MSCI Pakistan Index to be reclassified from Emerging Market (EM) to Frontier Market (FM).

According to Topline Securities, MSCI will consult with market participants on this reclassification proposal until August 31, 2021. MSCI will announce its decision by September 7, 2021.

If MSCI decides to downgrade Pakistan from Emerging to Frontier, it will be coinciding with the November 2021 Semi-Annual Index Review. The MSCI EM Index has three constituents from Pakistan, whereas MSCI FM Index is simulated to have four – with the additional constituent being OGDC.

The MSCI EM Small Cap Index has 13 constituents from Pakistan, whereas MSCI FM Small Cap Index is simulated to have 19 – with the additional constituents being Indus Motors (INDU), Bank Al-Habib Limited (BAHL), Abbott in Pakistan (ABOT), System Limited (SYS), the National Bank of Pakistan (NBP), and Packages (PKGS).

The rationale: Number of companies in the Pakistan equity universe that meet the relevant size and liquidity criterion of the MSCI Market Classification Framework has consistently been below the minimum of three index constituents required for EM.

Based on Pakistan’ weight of 0.02% and estimated global passive EM AUMs of $400-500bn, we estimate investment of passive EM funds in Pakistan to the tune of $175-225m, where around US$100-125m are likely invested in main EM stocks while US$75-100m are potentially parked in small cap EM stocks.

As per MSCI simulation, Pakistan is likely to have a weight of 2.3% in MSCI Frontier Market Index and 5.8% in the MSCI Frontier Market 100 Index. At the time of Pakistan’s upgrade to MSCI EM from FM in 2017, Pakistan’s weight in the MSCI Frontier Market 100 index was around 8.5%.

“We estimate potential investment from passive FM funds to the tune of $150-200m where $125-150m are likely in the main constituents,” Topline Securities said.

It is worth mentioning that some of the active Frontier Market funds were still investing in Pakistan even though it was classified as an Emerging Market.

“While the potential inflows and outflows remain early estimates and may largely net off, we believe the reclassification to Frontier status may turn out to be beneficial for Pakistan in terms of increasing visibility among foreign participants,” the firm added.

Foreigners have been key participants at Pakistan Stock Exchange; however, they have shied away recently due to Pakistan’s minimal weight in EM.

However, Frontier markets have trailed the bigger markets in recent times as liquidity has dried up due to COVID-19 and consistent underperformance.

Three times previously MSCI has downgraded markets from EM to FM:

–              MSCI Jordan Index in November 2008.

–              MSCI Argentina Index in May 2009.

–              MSCI Morocco Index in November 2013

The performance of these stock markets, one-year before and one-year after reclassification remained mixed.

In a small survey conducted with foreign investors, 50% believe this development is positive, 25% believe it is likely to have mixed implications and 25% believe it is negative for Pakistan equites.

The author is a senior business reporter with bylines in leading newspapers and magazines across Pakistan.


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