Foreign portfolio inflows in Pakistan have typically moved in tandem with the extent of country's inclusion in the MSCI indices. A quick look into recent past shows that $273 million were drained out of the market in the first five months of CY09, following Pakistan's exclusion from MSCI's emerging market index on December 31, 2008.
Although, a standalone Pakistan index was maintained by MSCI Barra throughout this time, FPI didn't start pouring in, until the effective reclassification of Pakistan index as part of MSCI Frontier Market Index at the end of May. FPI inflows, since June 1 to date, amount to $51 million.
One can argue that these flows are linked to improved macroeconomic fundamentals, ease in liquidity and growth in stock market capitalisation among others indicators. Rightly so, but all these indicators are incorporated in MSCI's rebalancing and reclassification and typically most foreign fund managers operating in Pakistan have pegged their investment policy to MSCI index. Had it not been the case, Pakistan would have started seeing higher FPI's as early as third quarter FY09, when expectations on economy became relatively positive.
The inclusion of Habib bank and Pakistan Petroleum Limited in MSCI Frontier Index in their August quarterly review has not only given foreign fund managers more choice to invest but it will enhances their confidence on Pakistani market.
MSCI Frontier Index currently has 14 Pakistani firms with its index weight increased by 64 basis points to 3.25 percent - led by MCB, OGDC and HBL that boast over $500 million of market cap each. If the stock market maintains its current momentum, the global index maker can possibly classify Pakistan back in the MSCI Emerging Market Index in its next review.