MSCI downgrades Pakistan to Frontier Markets


Consistent with the market expectations, the Morgan Stanley Capital Worldwide (MSCI) introduced on Wednesday to notch down Pakistan Inventory Alternate (PSX) amongst lesser superior economies into Frontier Markets (FM) index with impact from December 1, 2021.

It was categorized in MSCI’s main Rising Markets (EM) index since Might 2017 when the benchmark KSE-100 Index hit an all-time excessive of 53,000 factors, however the nation didn’t maintain the extent and the index by no means returned to that top degree since then.

Apparently, the market has largely factored-in the introduced resolution as buyers continued to promote shares for a couple of days at PSX. Accordingly, the MSCI’s resolution to downgrade Pakistan into Frontier Markets (FM) from Rising Markets (EM) stands ‘negative-to-neutral’ for buyers. They (overseas and native buyers) should, nonetheless, dump shares in an instantaneous gesture to formally acknowledge the choice and cherry choose shares later at decrease costs.

The benchmark KSE index dropped 188.56 factors (or 0.4%) and closed at a two-week low of 46,730 factors on Tuesday.

Consultants imagine the MSCI’s newest resolution on Pakistan is a blessing in disguise, because it has introduced PSX again into the limelight with its weight of 1.9% in Frontier Markets in comparison with a weight of mere two foundation factors in Rising Markets at current. “The comparatively greater weight in FM would spotlight PSX within the eyes of world buyers in comparison with its negligible dimension in EM,” Arif Habib Restricted Head of Analysis Tahir Abbas mentioned.

Oil and Fuel Improvement Firm (OGDC), Fortunate Cement, MCB Financial institution, Habib Financial institution Restricted (HBL) are the 4 firms from PSX that certified for FM. They might carry a cumulative weight of 1.9% in MSCI Frontier Market index as per their closing share worth on August 31, 2021, Aba Ali Habib Securities Analysis Analyst Zubair Jatoi mentioned in a brief commentary.

The dimensions of PSX would possibly develop in FM because the home financial system is on enlargement mode for over a 12 months now. It’s anticipated to develop by 4.8% within the present fiscal 12 months 2021-22 in comparison with 4% in FY21. It had contracted 0.5% in FY20.

“Final time, PSX carried a weight of over 9% in FM index (throughout 2008 to 2017),” Abbas recalled.

Barring Vietnam, Pakistan is having stronger financial fundamentals in comparison with peer economies like Kazakhstan, Kenya and Bangladesh in FM. The higher fundamentals with enlargement within the financial system would assist inflate the dimensions of PSX in FM index, going ahead, he mentioned.

The MSCI’s resolution would assist re-attract overseas buyers to the home bourse who’ve continued to exit from the marketplace for a couple of years now. “A bigger quantity (90-92%) of energetic international buyers monitor FM index to take choices on funding within the inventory markets across the globe,” he mentioned.

The developments (rising financial system and PSX reclassification in FM) ought to assist listed firms to regain their share costs. Accordingly, “the benchmark KSE-100 index ought to get better to over 50,000 factors degree the by finish of December 2021,” Abbas mentioned.

Earlier, it recovered to four-year excessive of near 49,000 factors in June 2021 from five-year low of round 27,000 factors hit in March 2020 within the wake of the Covid-19 pandemic.

Earlier in June 2021, MSCI proposed to downgrade PSX into FM from EM contemplating share costs (market capitalisation) at PSX maintained downturn since 2017 and full its session on this regard with market members (together with international buyers) until August 31, 2021.

“This conclusion follows suggestions obtained from market members from its latest session on a market reclassification proposal for the MSCI Pakistan Index,” MSCI mentioned in a press release in early hours on Wednesday (in line with Pakistan Customary Time).

“MSCI will reclassify the MSCI Pakistan Indexes from Rising Markets to Frontier Markets in a single step, coinciding with the November 2021 Semi-Annual Index Assessment (SAIR).”

It’s scheduled to carry the SAIR on November 11, 2021 whereas the overview resolution would come into impact from December 1, 2021, in line with one other announcement of MSCI made on August 11, 2021.

“Based mostly on a simulation utilizing professional forma information as of August 31, 2021, this might result in the inclusion of 4 securities within the MSCI Frontier Markets Index with an estimated index weight of 1.9%,” it mentioned.

Though the Pakistani fairness market meets the necessities for Market Accessibility underneath the classification framework for Rising Markets, it now not meets the requirements for dimension and liquidity. Extra particularly, index continuity guidelines have been utilized for the reason that November 2018 Semi-Annual Index Assessment to take care of the required three constituents within the MSCI Pakistan Index, it mentioned.

“Because the November 2019 SAIR, there have been no securities within the MSCI Pakistan fairness universe that meet the Rising Markets dimension and liquidity standards inside the MSCI market classification framework.”

Beginning with the November 2021 SAIR, the MSCI Pakistan Indexes shall be rebalanced utilizing dimension and liquidity necessities for smaller, common liquidity frontier markets as described in part 5.2 of the MSCI World Investable Market Indexes Methodology, it mentioned.

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