BOL EXCLUSIVE: Experts see short-term gains in PSX MSCI’s Index downgrade

ISLAMABAD: The Pakistan Stock Exchange’s (PSX) downgrade in the MSCI Index is expected to be a short-term gain but in the long run it is a huge loss, experts said.

Burg Securities Chief Operating Officer Rehan Ateeq said that the Pakistan Stock Exchange’s downgrade from the MSCI’s Emerging Markets Index to the Frontier Markets Index in the short-term may be good for the capital market but in the long run it will impact negatively.

When in 1994/95 the Pakistani stock market was upgraded in the MSCI Emerging Markets Index, the international investors were viewing Pakistan as a very lucrative market.

Leading investment banks and funds JP Morgan and Lehman Brothers had their offices in Pakistan in the 90s, he said, adding that when the economic sanctions were imposed on Pakistan after the nuclear test in 1998 most of the foreign banks and international funds wind-up their operations from the country.

Ateeq said that though after lifting of sanctions in 2000, the capital market witnessed a phenomenal rise but, at the same time, a lot of structural flaws were also exposed, which led to crisis in the market, which has nothing to do with the international sentiments.

He said when in the 2008 crisis the index was frozen for four months, the image of Pakistan’s stock market was badly tarnished.

“Freezing of index for four months shattered the confidence of [the] international investors on our stock market. We’re ousted from [the] Emerging Markets Index, though we made a comeback after nine years but still failed to restore the confidence of foreign investors.”

“We lost the shine and now our risk matrix is also very high in the eyes of [the] international funds. In the last 13 years, the market has witnessed net outflows instead of inflows,” he said.

Because of the weak regulatory mechanism, the market lacked the sophistication and is still fundamentally negative, he said.

However, Ateeq expressed the hope that leading funds like Franklin Templeton will find Pakistan attractive once we enter in the Frontier Markets Index.

“Instead of six in the Frontier Index we will have 16 companies and weightage of around 9 percent, which is more visible,” he added

Pak-Kuwait Investment Bank head of research Samiullah Tariq said that the major factor, which contributed mainly in the downgrade of the PSX is the rupee depreciation. When we reentered in the MSCI’s Emerging Markets Index in 2017, the exchange rate was Rs100 toRs102 against the dollar, which has now shot up to Rs160 toRs162.

“Because of the depreciation of the rupee, our weightage in the Emerging Markets Index reduced from 0.14 per cent to 0.034 per cent,” he said.

Tariq said the downgrade is likely to hurt the market sentiment but it will create investment opportunities, as well for the foreign investors.

“Big international funds Franklin Templeton, Black Rock, Vanguard, and Lazard Asset Management have high exposure in the Frontier Index and they’re very closely monitoring and investing in the Pakistani market,” he added.

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