September 7, 2021 (MLN): Index provider Morgan Stanley Capital International (MSCI) is slated to announce the re-classification of Pakistan to Frontier Markets Index (FM) from the current classification of Emerging Markets Index (EM) today.
The decision will lead to higher inflows of investment as Pakistan would now have a higher weight in FM compared with the negligible weight in the Emerging Markets and could attract more inflows than currently in EM.
The announcement will take effect in November 2021 and coincide with MSCI’s November 2021 Semi-Annual Index Review.
To recall, in June 2016 MSCI had classified Pakistan to Emerging Markets status from Frontier Markets status, coinciding with the May 2017 Semi-Annual Index Review. At that time, 6 stocks were included in EM, resulting in a weightage of 0.14 percent. Currently, EM Index has 3 constituents and carries a negligible weight of 0.02 percent. In its previous statement in June’21, MSCI stated that it had been artificially maintaining Pakistan’s stature in Emerging markets since the country had been no longer meeting EM standards for size & liquidity criteria for the last 19 months.
Foreigners who have been major participants at Pakistan Stock Exchange hung back recently due to Pakistan’s minimal weight in EM. To note, they had been net sellers of $1.3 billion ever since Pakistan was included in EM four years back.
Earlier this year in June’21, MSCI released the results of the 2021 Market Reclassification Review, where it had proposed to downgrade Pakistan to Frontier Markets (FM) from Emerging Markets (EM).
Previously, MSCI has downgraded three markets from EM to FM including MSCI Jordan Index in November 2008, MSCI Argentina Index in May 2009, and MSCI Morocco Index in November 2013. Moreover, the performance of these stock markets, one year before and one year after reclassification remained mixed, a report by Topline Securities cited.
With regards to Pakistan, this development is expected to turn out beneficial for Pakistan Stock Exchange in terms of increasing visibility among foreign participants and will likely bring positive inflows of investments.
While most of the market participants foresee that the higher weight in the FM index will attract increased foreign investment, there are some who believe that a downgrade to the FM index will increase foreign selling. A research report by EFG Hermes said that the downgrade of Pakistan to FM status will lead to further selling in September and expects net passive outflows of $120mn, with LUCK, MCB, and HBL being the hardest hit.
Commenting on the aforementioned development via tweet, Founder and Chief Investment Officer at Tundra Fonder, Mattias Martinsson said, “Initial flows impact will be small. Medium-term (3-6 months) will b positive. Most frontier managers are more curious (more nerds). Will see more foreigners in Pak next two years.”
Copyright Mettis Link News
43195
