Morgan Stanley Capital International (MSCI) has downgraded Pakistan’s bourse to its Frontier Markets index, which is a group of less developed economies, by removing it from the Emerging Markets index with effect from December 1, 2021.
The US-based analytics and index provider has incorporated Pakistan Stock Exchange’s (PSX) three large-cap (capitalisation) stocks into its Frontier Markets index and 14 small-cap stocks into the Frontier Markets small-cap index, according to results of the MSCI Semi-Annual Index Review.
MSCI has surprised Pakistan with its decision to remove Oil and Gas Development Company (OGDC) from among the large-cap stocks and has added Systems Limited into small-cap stocks, stated local research houses in their reports.
It also surprised PSX investors by reducing the number of Pakistani stocks to 17 in the Frontier Markets compared to 23 considered in a simulation held two months ago in September.
Global investors track the MSCI indexes to make investment decisions.
The three large-cap stocks are Habib Bank Limited (HBL), Lucky Cement and MCB Bank. They would carry “an aggregate weight of 1.25%” in the Frontier Markets index, the MSCI announced.
Earlier, the index provider had considered four large-cap stocks (including OGDC) and 19 small-cap stocks in its simulation held in September.
Had Pakistan’s stocks been incorporated as per the simulation, Pakistan’s weight would have been higher in the index, which would have encouraged global investors to pour a higher amount of money into such stocks, according to the local research houses.
They estimated Pakistan’s weight in the MSCI Frontier Markets index in the range of 1.4-2.3%, considering the inclusion of OGDC in large-cap stocks as per the simulation.
The 14 small-cap stocks include Bank Alfalah, Engro Corporation, Engro Fertilisers, Fauji Fertiliser, Hub Power, Mari Petroleum, Millat Tractors, Pakistan Oilfields, Pakistan Petroleum, Pakistan State Oil, Searle, Systems Limited, TRG Pakistan and United Bank.
“As previously announced, Pakistan will be reclassified from Emerging Markets to Frontier Markets in one step coinciding with this (Semi-Annual, November 11, 2021) Index Review,” the MSCI said in a press release.
“(The) changes … will take place as of the close of November 30, 2021,” it said.
“Systems is the only stock which was not part of the MSCI Emerging Markets but has made it to the MSCI Frontier Markets,” pointed out Ismail Iqbal Securities Head of Research Fahad Rauf in a commentary.
“This can help attract some (investment) flows, though it is not a new stock for foreign investors.”
Next in line would be the MSCI’s decision on consultation on potential inclusion of Pakistan in the MSCI FM100 index and the MSCI Frontier Markets 15% Country Capped index. “This will be important for attracting passive funds,” he said.
The result of the consultation will be announced along with the February 2022 quarterly review and will be made part of the May 2022 Semi-Annual Index Review.
“We believe that foreign selling has remained a continuous phenomenon and would not be a major threat post-exit (from Emerging Markets), although some pressure on large names such as Lucky, HBL and MCB can be witnessed, which in our view would be a good time to build positions in these names.”
Published in The Express Tribune, November 13th, 2021.