Morgan Stanley Capital proposes to reclassify Pakistan into MSCI Frontier Markets

KARACHI, Pakistan: In a recent development, Morgan Stanley Capital International (MSCI) has proposed to reclassify Pakistan into MSCI Frontier Markets (MSCIFM) from MSCI Emerging Markets (MSCIEM).

“MSCI has been artificially maintaining Pakistan’s stature in Emerging markets since the country has been no longer meeting EM standards for size & liquidity criteria for last 19 months,” according to statement released by MSCI.

Thus, it is now proposed to put Pakistan back to Frontier markets with a higher weight of 2.3 per cent from existing meager country weight of 0.02 per cent in Emerging markets.

Moreover, Pakistan’s weight in the widely tracked Frontier Market 100 Index will now be 5.8 per cent whereas Oil and Gas Development Company (OGDC) has been included in MSCI Pakistan standard Index.

An analyst at JS Global Capital said currently, the weight of the MSCI Pakistan Index in the MSCI Emerging Markets Index stands at 0.02 per cent. “If the reclassification takes place, the weight of MSCI Pakistan Index in the MSCI Frontier Markets Index is expected to be 2.3 per cent whereas Pakistani securities would have a simulated weight of 5.8 per cent in the MSCI Frontier Markets 100 Index.

Although country classification has been downgraded one notch from Emerging to Frontier markets, this boded well for local stock market as Pakistan will enjoy higher weightage in Frontier Markets compared to negligible weight in Emerging Markets which may result into net inflows in Pakistan market.

“We expect lower outflow from funds tracking Emerging markets since already foreigners have been net sellers of $1.3 billion ever since Pakistan included in EM four years back (K5E-100 index down 5 per cent since then),” an analyst at Sherman Securities said .

As per MSCI, discussion on classifying MSCI Pakistan Index from EM to FM will continue till August 2021 while the final announcement will be made by September 07, 2021. Interestingly, Pakistan market is now available at 35-40 per cent discount to fund managers tracking frontier markets as Pakistan market was trading close to 9x on forward PE at the time when Pakistan reclassified from FM to EM.

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