MSCI downgrade to result in $152 million outflows

KARACHI: The MSCI has confirmed that it would downgrade Pakistan to Frontiers Market (FM) status with effect from December 1, 2021.

“We forecast the downgrade will mean passive outflows from [the Emerging Market] EM trackers of $152 million; $110 million alone will come from Lucky Cement, Habib Bank and MCB Bank; the remaining $42 million will come from 13 small-cap stocks,” Simon Kicthen at EFG Hermes said in a report.

Pakistan currently only accounts for 2bps of the MSCI EM Index. Foreigners have net sold $61 million since the MSCI announced the consultation on Pakistan’s downgrade in late June; they have now net sold $157 million year-to-date.

“Pakistan is not widely held by actively-managed GEM funds. This may limit short-selling by event-driven funds ahead of the November downgrade, and we are likely to see a spike in foreign outflows on the last trading day in November,” Analyst Ahmed Difrawey said.

Lucky Cement and Habib Bank Limited (HBL) have already both underperformed the KSE-100 index since the MSCI announced the consultation, down 11 per cent and 8.7 per cent, respectively, versus a 7 per cent decline for the index; however, the MCB has gained 4 per cent since the announcement.

Analysts believe there will be no passive FM inflows to coincide with the EM downgrade in November.

The MSCI has launched a consultation on whether Pakistan should join the FM-100 index, which is used as a benchmark by the two main FM index trackers, these collectively have assets under management (AUMs) of $1 billion.

The MSCI will announce the results of the consultation in February 2022; and it is expected that Pakistan will join FM-100. Passive inflows following Pakistan’s addition to FM-100 would coincide with the May 2022 Semi-Annual Index Review.

“We will not know the stocks and index weights in FM-100 until shortly before the effective date for the May 2022 SAIR. The MSCI gave a proforma estimated weighted of 5.8 per cent for Pakistan in the MSCI FM-100 when it launched its initial consultation in June 2021,” Jawad Shamim at EFG Hermes said.

“This weight would translate into passive inflows from the FM index trackers of $53 million, assuming the iShares FM ETF includes Pakistan in its benchmark (the MSCI Frontier and Emerging Markets Select Index).”