MSCI announced on Jun 14, 2016, that Pakistan will be reclassified from Frontier Markets (FM) to Emerging Markets (EM) coinciding with the May 2017 Semi-Annual Index Review. The exact proportion of Pakistan Market in the MSCI-EM and the stocks to be included are to be announced on May 15, 2017, and would be effective from Jun 1, 2017.
A Â positive sentiment is likely to prevail post inclusion in MSCI-EM index while foreign funds will get the exact proportion of Pakistani Stocks on May 15 and would likely start rebalancing more aggressively from then.
While on the day before inclusion, i.e. May 31, 2017, an amplified volume and volatility is expected on the bourse, similar to the activity witnessed on Mar 17, 2017, hen the FTSE index rebalancing took place.
Similar to Dubai & Qatar – which rallied 90pc & 46pc from MSCI-inclusion announcement (Jun 11, 2013) up till the  actual inclusion (Jun 1, 2014), Pakistan’s KSE-100 index has rallied 33pc since the announcement to date with only 17 trading sessions left before the inclusion.
Post inclusion, Dubai & Qatar markets shed 25pc & 5pc respectively by the end of 2014, however it is  believed 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 US$108/bbl, after which Arab Light prices crashed 50pc closing the year 2014 at US$55/bbl.
It is expected that PSX will enter a consolidation phase post inclusion, with fundamentals coming back into the foray. The index target for 2017 remains intact and Topline believes that KSE-100 would close the year around the 56,000 points level. Pakistan is expected to have a 0.15pc weight in MSCI-EM and the following six stocks are likely to be included.
Initially, MSCI proposed an inclusion of 9 Pakistani stocks in EM-index when it announced Pakistan’s upgrade on Jun 14, 2016, however, in its semi-annual review in Nov 2016, it reduced the list to seven companies.
MSCI has set quantitative & qualitative classification framework for inclusion in it’s index. Companies with a market cap of US$1,260m, free float market cap of US$630m and 15pc ATVR (Average Traded Value Ratio) will be part of the index. Furthermore, companies must also meet MSCI subjective criteria in terms of openness to foreign ownership, ease of capital flows, efficiency of operational framework and stability of the institutional framework. FFC no longer meets the capitalization criteria as it has declined 10pc since Nov 2016.
As per Topline’s strategy report in Dec 2016, the company maintains the view that net inflow from foreigners during 2017 could be in the range of US$100-200m. This is based on the following assertions and assumptions;
Total funds tracking MSCI-EM are US$1.4-1.7t out of which around US$350b (20-25pc) are passive.
This results in gross inflow of EM passive funds of around US$450m based on an expected 0.15pc weight in the MSCI-EM index. Exclusion from MSCI Frontier Markets (FM) would lead to outflows of around
US$150m, which results in net inflow from upgrade of around US$300m. Further, accounting for ongoing selling, our net inflow for 2017 is expected in the range of US$100-200m.
Based on average daily turnover and allocation of US$450m passive flows, it could take approximately 30 days to execute.
However, it is likely that those flows would be met much quicker, as funds tracking MSCI-EM index may cross large blocks of shares with FM funds as witnessed during the FTSE rebalancing. Further, Topline believes that local funds would also provide liquidity to the foreigners as they have deployed idle cash post Panama-case verdict.
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