PSX likely to be up­graded to MSCI EM In­dex

Pakistan Observer - - ECONOMY WATCH -

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.

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