MSCI downgrades Pakistan to Frontier Markets

Statesman Report
KARACHI: In line with the market expectations, the Morgan Stanley Capital International (MSCI) announced on Wednesday to notch down Pakistan Stock Exchange (PSX) among lesser advanced economies into Frontier Markets (FM) index with effect from December 1, 2021.
It was classified in MSCI’s leading Emerging Markets (EM) index since May 2017 when the benchmark KSE-100 Index hit an all-time high of 53,000 points, but the country failed to sustain the level and the index never returned to that high level since then.
Apparently, the market has largely factored-in the announced decision as investors continued to sell stocks for a few days at PSX. Accordingly, the MSCI’s decision to downgrade Pakistan into Frontier Markets (FM) from Emerging Markets (EM) stands ‘negative-to-neutral’ for investors. They (foreign and local investors) may still, however, dump stocks in an immediate gesture to formally acknowledge the decision and cherry pick stocks later at lower prices.
The benchmark KSE index dropped 188.56 points (or 0.4%) and closed at a two-week low of 46,730 points on Tuesday.
Experts believe the MSCI’s latest decision on Pakistan is a blessing in disguise, as it has brought PSX back into the limelight with its weight of 1.9% in Frontier Markets compared to a weight of mere two basis points in Emerging Markets at present. “The comparatively higher weight in FM would highlight PSX in the eyes of global investors compared to its negligible size in EM,” Arif Habib Limited Head of Research Tahir Abbas said.
Oil and Gas Development Company (OGDC), Lucky Cement, MCB Bank, Habib Bank Limited (HBL) are the four companies from PSX that qualified for FM. They would carry a cumulative weight of 1.9% in MSCI Frontier Market index as per their closing share price on August 31, 2021, Aba Ali Habib Securities Research Analyst Zubair Jatoi said in a short commentary.
The size of PSX might grow in FM as the domestic economy is on expansion mode for over a year now. It is expected to grow by 4.8% in the current fiscal year 2021-22 compared to 4% in FY21. It had contracted 0.5% in FY20.
“Last time, PSX carried a weight of over 9% in FM index (during 2008 to 2017),” Abbas recalled.
Barring Vietnam, Pakistan is having stronger economic fundamentals compared to peer economies like Kazakhstan, Kenya and Bangladesh in FM. The better fundamentals with expansion in the economy would help inflate the size of PSX in FM index, going forward, he said.
The MSCI’s decision would help re-attract foreign investors to the domestic bourse who have continued to exit from the market for a few years now. “A larger number (90-92%) of active global investors track FM index to take decisions on investment in the stock markets around the globe,” he said.