PSX likely to be upgraded to MSCI EM Index
OBSERVER REPORT KARACHI—Pakistan Stock Exchange (PSX) is likely to get an emerging market status in the today’s decision by the Morgan Stanley Capital International (MSCI), though some officials are skeptical about the possible inclusion because of the market capitalisation and free-float issues. “Our foreign associates said big fund managers have recommended Pakistan into the MSCI EM (emerging market) Index. It shows the MSCI has already made its mind ready,” said Arif Habib, chairman of Arif Habib Group. Hopes of reclassification caused an increase of around 3,000 points in the PSX’s benchmark 100-share Index during the last couple of months.
“Pakistan technically fulfills all such requirements,” said Managing Director Nadeem Naqvi said. “We are hopeful to be included in the EM Index.” An official, who did not want to be named, however reasoned against any such likelihood. “MSCI was not happy on free-float and market capitalisation of the stocks that would be moved up into the index,” said the official. It took around three years for Qatar and UAE to be included in the EM index. The official said the consultative process on Pakistan’s reclassification started just last year. “It may take Pakistan for another one year,” he said.
Even if the MSCI decides Pakistan’s up-gradation, the PSX would be inducted only in June 2017, one year after the decision. Inducted into the EM index, number of Pakistan’s companies would be cut down to 28 companies compared to 36 stocks in the frontier market index. It will include three large capital stocks, six mid cap and 19 small cap stocks. The free-float adjusted market capitalisation would be 16 percent lower under the EM index.
Pakistan has an average weight of eight percent in FM, which is a strong index, while it will be having potential weight of 0.19 percent only in the EM, second to the lowest 0.18 percent weight of Czech Republic. China has the largest weight of 25.41 percent in the EM index while India is the fourth largest heavyweight with 9.03 percent. Last year, UAE and Qatar stock markets were upgraded to the EM Index and they saw arrival of $400 million each within the six months of the upgrade.
FM is market of a couple of billion dollars, while EM is a market of over a trillion dollars, “So even our lower weight can bring more investment,” Naqvi said. “I can see at least $100 million to $300 million investment coming under EM after one year of our movement into the index.” Large capitalisation companies that would likely be part of the list include Oil and Gas Development Company Limited, Habib Bank Limited and MCB Bank Limited.
Mid-cap category includes United Bank Limited (large cap in FM and mid cap in the EM), Lucky Cement, Fauji Fertilizer Company Limited, Engro Corporation, Hub Power Company and Pakistan State Oil. Stocks that would form small cap include National Bank of Pakistan, Indus Motor Company, Fatima Fertilizer, Kot Addu Power Company, Fauji Cement, Dawood Hercules Corp, Packages, Pakistan Oilfields, Fauji Fertilizer Bin Qasim, Searle Pakistan, Maple Leaf Cement, Bank Al-Falah, Pak Suzuki Motor Co, Kohat Cement, Nishat Mills, Ferozesons Laboratories, IGI Insurance, Pak Elektron, and Millat Tractors.
A MSCI document said Pakistan Petroleum Limited, K-Electric, PTCL and few other stocks, which are part of the FM Index, will not be included in the EM index. Pakistan had received the emerging market status in early 90s that continued till 2008, when stock market saw the crisis and was shut down for some period, which resulted in heavy losses to the foreign investors and they sold their shares with huge discounts. This resulted in Pakistan’s expulsion from the EM Index in December 2008. Later, it was included in the list of the FM index in May 2009.