- *Six Pakistan stocks in MSCI EM with lower than expected 0.10pc weight
Morgan Stanley Capital International (MSCI) on Tuesday upgraded the Pakistan Stock Exchange (PSX) to Emerging Markets status; the inclusion will be effective from June 1, 2017.
The MSCI in its Semi-Annual Index Review announced Pakistan’s entry into MSCI Emerging Markets (EM) index with Pro Forma weight of 0.10 per cent in the index (based on data as of April 20, 2017, as per MSCI announcement, dated May 15, 2017), below expectations.
There are 6 stocks that are part of MSCI EM Index, including one large cap: Oil & Gas Development Company (OGDC), and five mid-caps; Habib Bank (HBL), United Bank (UBL), Lucky Cement (LUCK), MCB Bank (MCB), and Engro Corporation (ENGRO). The simulated MSCI Pakistan Investible Market Index (IMI) has a total of 33 stocks.
Among 6 MSCI EM stocks, the highest weight will be of HBL (based on free-float market cap), followed by the UBL, LUCK, ENGRO, OGDC and MCB.
Pakistan remained in MSCI EM Index during 1994-2007. However, Karachi Stock Exchange’s temporary closure in 2008 due to a liquidity crunch amid the global financial crisis forced MSCI to drop the country from MSCI EM index. In May 2009, Pakistan was shifted from standalone to Frontier Markets (FM) Index.
Pakistan showed significant improvement during the last few years and met all quantitative and qualitative criteria for up-gradation to MSCI EM, including size and liquidity. Based on this, on June 14, 2016, the MSCI announced to reclassify Pakistan from FM to EM coinciding with the May 2017 Semi-Annual Index Review.
In Asian FM, Pakistan had been put along with Sri Lanka, Bangladesh and Vietnam. Now in Asian EM, Pakistan will be part of 8 other countries like China, Korea, Taiwan, India and Malaysia etc.
Similar to Dubai and Qatar, which rallied 90 per cent and 46 per cent from MSCI-inclusion announcement (June 11, 2013) up till the actual inclusion (June 1, 2014), Pakistan’s KSE-100 index has rallied 9.6 per cent since the announcement to date with 12 trading sessions remaining till effective date (June 1, 2017).
Post-inclusion, Dubai & Qatar markets shed 22pc & 16pc in one month; however, we believe that inferring post-inclusion performance may not be a good proxy as those markets were upgraded around the time when international oil prices were at peak levels of around $108/bbl, after which Arab Light prices crashed 50 per cent closing the year 2014 at $55/bbl.
Total funds tracking MSCI-EM are $1.5-1.7 trillion, out of which around 20 per cent are passive funds (approx. $300 billion). This results in gross inflow of EM passive funds of around $300 million based on Pakistan’s expected weight of 0.1pc in MSCI-EM index.
The analyst of Topline brokerage house said, “Pakistan’s exclusion from MSCI FM would lead to passive outflows of around $100 million ($17-20 billion of funds track MSCI FM, 3-5 per cent funds are passive).
Analysts believe that the PSX would enter a consolidation phase post-inclusion, with fundamentals coming back into the foray. He further said we are of the view that KSE-100 would close the year around the 56,000 points level.
The KSE-100 index went down by 574 points today (Tuesday) and closed at 51,813 point level after touching the highest level of 52,846 points last trading session.
