RECORDER REPORT
KARACHI: The Morgan Stanley Capital International (MSCI), in its decision early Wednesday morning, has decided to downgrade Pakistan from Emerging Market (EM) to Frontier Market (FM).
This conclusion follows feedback received from market participants from its recent consultation on a market reclassification proposal for the MSCI Pakistan Index.
The MSCI will reclassify the MSCI Pakistan Indexes from EM to FM in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR).
The MSCI EM Index has three (3) constituents from Pakistan, whereas MSCI-FM Index is simulated to have four (4) constituents – with OGDC being the additional constituent– as per June-2021 simulation provided by MSCI.
The MSCI-EM Small Cap Index has 13 constituents from Pakistan, whereas MSCI-FM Small Cap Index is simulated to have 19 constituents – with INDU, BAHL, ABOT, NBP, SYS and PKGS being the additional constituents – as per June-2021 simulation provided by MSCI.
According to MSCI, Pakistani equity market meets the requirements for Market Accessibility under the classification framework for Emerging Markets; however it no longer meets the standards for size and liquidity.
More specifically, index continuity rules have been applied since the November-2018 Semi-Annual Index Review to maintain the required three constituents in the MSCI Pakistan Index.
Pakistan to become part of MSCI FM-100 Index from May-2022:
MSCI announced Wednesday the launch of a consultation on the potential inclusion of the MSCI Pakistan Index to the MSCI Frontier Markets 100 Index and the MSCI Frontier Markets 15 percent Country Capped Index as part of the May 2022 Semi-Annual Index Review (SAIR).
The results of this consultation will be announced coinciding with the February 2022 Quarterly Index Review.
This consultation does not, in any way, affect the reclassification of MSCI Pakistan Index to the MSCI Frontier Markets Index, which will take place in one step as part of the November 2021 SAIR.
In line with the methodologies for the MSCI Frontier Markets 100 Index and the MSCI Frontier Markets 15 percent Country Capped Index, new Frontier Markets may only become eligible for these indexes as part of a May SAIR, after public consultation.
Market may stabilize post November-2021 rebalancing: Potential gross outflow of around $150 million: “Based on Pakistan’ weight of 0.02 percent and estimated global passive EM AUMs of $400-500 billion, we estimate investment of passive EM funds in Pakistan to the tune of $125-175 million, where around $75-100 million are likely invested in main EM stocks while $50-75 million are potentially parked in small cap EM stocks,” Syed Atif Zafar at Topline Securities said.
Potential gross inflow of around $100 million-150 million:
As per MSCI simulation, Pakistan is likely to have a weight of 1.9 percent in MSCI FM Index and 5.5 percent in the MSCI FM 100 index (at the time of Pakistan’s upgrade to MSCI EM from FM in 2017, Pakistan’s weight in MSCI FM 100 index was around 8.5 percent). “It is difficult to gauge flows with respect to FM due to lack of data availability, however we estimate potential investment from FM funds to the tune of $100-150 million, where $75-100 million maybe in the main constituents,” he said. It is worth mentioning that some of the active FM funds have been investing in Pakistan even though it was classified as an EM.
Impact: Syed Atif Zafar said that the potential inflows and outflows remain early estimates and may largely net off. “However we believe the reclassification to FM from EM may turn out to be beneficial for Pakistan in terms of reduction in foreign selling,” he said. Foreigners have sold equities worth $730 million (net) since December 31, 2019, and have sold equities worth $159 million (net) this year already. “We expect the selling pressure from foreign fund to persist till at least November-2021, and may wade off post the rebalancing,” he added.
