MSCI reclassifies Pakistan from Emerging to Frontier Markets

Javed MirzaWeb Editor

08th Sep, 2021. 01:39 pm
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KARACHI: The Morgan Stanley Composite Index (MSCI) has announced the reclassification of MSCI Pakistan Indexes from Emerging Markets (EM) to Frontier Markets (FM).

“The reclassification is a result of the three existing stocks, including Habib Bank Limited (HBL), MCB Bank (MCB) and Lucky Cement no longer meeting the standards for size and liquidity since the past two years,” an analyst at JS Global Capital said.

“The implementation will coincide with the November 2021 Semi-Annual Index Review, where we expect a cumulative net outflow of over $100 million from EM funds in HBL, MCB and LUCK.”

Pakistan will have an inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.90 per cent, compared with an estimated 6 per cent weight when Pakistan was a part of the Frontier Markets four years ago and was promoted to the Emerging Markets.

The results of another consultation regarding inclusion in the MSCI FM 100 and MSCI FM 15 per cent Country Capped Index, will be announced coinciding with the February 2022 Quarterly Index Review.

The reclassification to the Frontier Markets will be done in a single go in the November 2021 Semi-Annual Index Review (SAIR). To recall, MSCI had consulted with market participants till August 31, 2021 and after receiving relevant feedback, announced the decision on Tuesday evening.

“The market classification framework for [the] MSCI FM is full market cap of $1.171 billion, free-float market cap of $88 million and ATVR at 2.5 per cent as compared to MSCI EM criteria of full market cap at $2.343 billion, free-float market cap at $1.171 billion and ATVR of 15 per cent,” an analyst at Arif Habib Limited said.

“The reason for potential reclassification is the steady decline in [the] market cap of Pakistan constituents since 2017 leading towards ineligibility on meeting the criteria in the market classification framework for EM.”

“Although the index continuity rule had been applied for MSCI Pakistan since November 2018 to artificially maintain the MSCI Pak index in EM, none of the three companies in MSCI EM met the EM classification framework since November 2019.”

The simulated index for the MSCI Pak FM would have a total 23 companies, including four standard and 19 small cap, compared with the existing 16 companies in the MSCI Pak EM (three mid cap and 13 small cap).

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