KARACHI: Morgan Stanley Capital International (MSCI) is set to include four additional Pakistani companies in its global Frontier Market (FM) index next month, reflecting their recent share price increases. This addition is expected to attract international investors, who use the index to guide their multibillion-dollar portfolios and global investment strategies.
The anticipated MSCI decision may prompt foreign investors to boost their stakes in companies already listed on the Pakistan Stock Exchange (PSX), which was the top-performing market worldwide in the fiscal year 2023-2024. Moreover, the initiation of the next $7 billion International Monetary Fund (IMF) loan program for Pakistan in August 2024 is likely to further enhance external investment at the PSX.
Topline Research Senior Analyst Shankar Talreja predicts the inclusion of DG Khan Cement (DGKC), Sazgar Engineering (SAZEW), Faysal Bank (FABL), and Fauji Fertiliser Bin Qasim (FFBL) in the FM index. Fauji Cement (FCCL) might also be added, although its free float is marginally above the last review threshold. TRG (The Resource Group) Pakistan, however, does not meet the market capitalization requirement of $126 million, with its cap ranging between $105-117 million over the past ten trading days. Nonetheless, the buffer rule might allow TRG to stay in the index.
MSCI is scheduled to announce its Quarterly Index Review (QIR) on August 12, 2024, with any changes taking effect from September 2, 2024. During the last review in May 2024, the minimum thresholds for free float and market capitalization were raised, from $57 million to $63 million and from $114 million to $126 million, respectively.
The four companies expected to join the FM index meet MSCI’s updated criteria for free float and market capitalization. Any changes to these thresholds will be revealed with the review results, which are typically updated quarterly. “Any upward revision in the free float or market cap threshold by MSCI may affect our estimates,” Talreja noted.
Following the addition of these four companies and a 9% increase in the market cap of existing index constituents, Pakistan’s weight in the FM index is projected to rise by 35-45 basis points, reaching 4.7-4.8% from the current 4.2-4.3%. Talreja estimates that this increase could lead to gross inflows of $20-45 million, assuming an asset under management (AUM) size of $5-10 billion tracking the MSCI FM index.
Anticipation of the forthcoming IMF extended fund facility (EFF) has already led international investors to increase their stakes in PSX-listed companies. Finance Minister Muhammad Aurangzeb recently confirmed that the IMF Executive Board is expected to approve the loan in August 2024, following a staff-level agreement achieved last month.
The PSX benchmark KSE 100 Index surged to an all-time high near 82,000 points in mid-July 2024, up from about 40,000 points in June 2023, reflecting over 100% growth in just 13 months. Despite closing at 78,226 points on August 2, 2024, due to profit-taking amid political uncertainty, local brokerage houses forecast the index will reach approximately 110,000 points by the end of fiscal year 2024-25, driven by the upcoming IMF program and improved investor confidence.
