Presently, Pakistan MSCI Index is the part of $17-20 billion Frontier Market funds. Equity analysts expect the country's inclusion in emerging market category would attract at least $300-700 million portfolio investment into the dollar-hungry country which, the MSCI said, now "comfortably meets the size and liquidity criteria of Emerging Markets".
"The size of the Pakistani equity market has expanded over the last few years and market liquidity has improved," said MSCI in its review. Morgan Stanley, under its market framework criteria, judges international bourses for Emerging Market classification in terms of size and liquidity and market accessibility. Pakistan capital market, according to MSCI criteria, had achieved $1.26 billion full market cap, $635 million float market cap and 15 percent ATVR security liquidity.
As for market accessibility, the country's openness to foreign ownership and ease of capital inflows/outflows has been rated as "significant", efficiency of the operational framework as "good and tested" and competitive landscape as "high". Thanks to the country's poor track record on institutional development, the MSCI deems "stability of the institutional framework" in Pakistan as "modest". Compared to 16 constituents and 8.4 percent weight in frontier markets index, Pakistan in MSCI's Simulated Standard Index would have 9 constituents and 0.2 percent weight. The nine scrips put as constituents into the emerging market index include two large cap, OGDCL and HBL, and seven mid cap securities: UBL, MCB, LUCK, ENGRO, FFC, HUBC and PSO.
The Simulated MSCI Pakistan Investible Market Index (IMI) has 27 listed companies. NBP, INDU, KAPCO, POL, FCCL, SEARL, MLCF, PKGS, FFBL, KOHC, BAFL, APL, NML, PSMC, PAEL, IGIL, FEROZ and MTL are the small cap firms provisionally short-listed to be part of MSCI Pak Index.
"Graduating into a novel MSCI Index category... can be a game-changer for the local bourse and is expected to open up new avenues for the market to grow," said analyst Syed Atif Zafar at JS Research. Taking cue from both the UAE and Qatar markets, which exhibited 45 percent re-rating in their PE multiples 12 months post the announcement in May 2013 of up-gradation from FM to EM, there is no reason that Pakistan equities would not undergo the same.
Currently, Pakistan is trading at a 24 percent discount to EM Index. "We expect this discount to narrow betting on improved economic activity and inclusion into EM index," he said. He said while some quarters were concerned that Pakistan's 0.19 percent weight in the Emerging Markets would pass as a tracking error, one should not forget countries like Czech Republic and Egypt which, having similar weights to Pakistan, were trading at 47 percent premium to Pakistan. Shahbaz Ashraf of AHL Research underlined that MSCI EM Index was mainly dominated by economically giant countries with more vibrant capital markets, like China weighing 24.4pc, South Korea 15.3pc, Taiwan 12.4pc, India 8.5pc, South Africa 7.2pc and Brazil 5.2pc.
Czech Republic, he said, was the only market smaller than Pakistan's. Ashraf said being categorised amongst those with better economic growth rates, fiscals and externals alongside bigger, more liquid and adequately eco-representative capital markets would highlight Pakistan's significance in the world markets. "It apparently looks more favourable for Pakistan to be categorised in the higher MSCI EM Index category," he said. Saad Hashemy of Topline Securities, however, said even though Pakistan's share was significantly lower in EM compared to FM, its improving macros and upside from China-Pakistan Economic Corridor (CPEC) would prove to be compelling story in EM universe.
Ashraf said the market up-gradation should bring in net flows of $600-700 million in a span of one year. "However, the inflows could be much higher given FM funds do not redeem and stay invested given Pakistan offers lucrative return based on improving economic theory".
Zafar at JS Research warned of what he called near-term risks to the market performance. "We flag vote on Brexit on June 23rd and rising geo-political tensions". Further, Ashraf said in the larger scheme of events scheduled for the month of Jun'16, the now more pertinent global investors would be closely watching the pending decisions from the US Fed, BoJ, and ECB on their respective monetary policies. "Additionally, key event remains the upcoming vote on Brexit that may extend volatility into the global equity's market," he warned.