BOL EXCLUSIVE: PSX likely to be downgraded to Frontier Markets in November

Hamza HabibOur Correspondent

12th Aug, 2021. 03:52 pm

ISLAMABAD: The Pakistan Stock Exchange is likely to be downgraded from the existing Emerging Markets Index to Frontier Markets Index from November onwards this year.

A senior official of the Securities and Exchange Commission of Pakistan (SECP) said in May 2017, Morgan Stanley Composite Index (MSCI) reclassified Pakistan’s market as “Emerging Market Index” from its Frontier Markets status.

The then government highlighted it as a bigger success. However, according to the MSCI’s semi-annual review of 2017, only six companies qualified for the “Emerging Markets Index” with a weightage of only 0.14 per cent, whereas, in the same review, the MSCI included 16 stocks in the Frontier Markets with a weightage of 9. So, the large chunk of Pakistani stocks was in the Frontiers Markets.

The organisations included in the Emerging Markets included United Bank Limited, Habib Bank Limited, Lucky Cement, Oil and Gas Development Company, MCB Bank Limited and Engro Corporation.

“The situation was like a small fish in the ocean. The Emerging Markets classification includes countries like Brazil, China, Colombia, Greece, Hungary, Russia, etc. That was why three Pakistani stocks, of the six, couldn’t sustain a presence in EM and reclassified as Frontier markets indexes, the senior SECP official said.

Secondly, he said, the inclusion in the Emerging Markets never suits Pakistan because there are different types of investors in both the markets. The investors who invest in the Frontier Markets, do not operate in the Emerging Markets and those who trade in the Emerging Markets, are not interested in the Frontiers Markets.

Subsequent to the date of reclassification, the KSE-100 Index that was at 52,000 points in May 2017 dropped to 46,565 points by end of June 30, 2017 and foreign selling of $193 million was witnessed in a month’s period.

It further dropped to 40,471 points by the end of December 2017. That happened because foreign investors, who were interested in the Frontier Markets, exited the PSX but the Emerging Markets investors’ didn’t show interest, as the PSX was a small underdeveloped market for them. The height of May 2017 (at the time of classification as the Emerging Market) was not witnessed till now.

In addition to outflows of foreign investment from the bourse, the trading volumes also significantly dropped. Due to the government and the management of PSX measures the bourse continued to perform during Covid, as the trading volumes improved significantly, but again the improved trading is not witnessed in the MSCI indices.

Currently, three stocks, HBL, MCB and Lucky, are in the Emerging Markets, and they are not performing well. “We hope that after their downgrading to the Frontiers Market Index, these indices will be available to investors of the Frontier Markets where Pakistan has good weight and can be easily tracked by the foreign investors.”

The SECP official said the MSCI’s classification doesn’t matter much as many private companies do such classifications to facilitate its clients.

They have their own parameters, and may not reflect actual economic indicators of a country, he added.

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