Karachi, September 08, 2021 (PPI-OT): Pakistan Strategy: MSCI Review – Back to Frontier Market

A move that was widely anticipated, MSCI has officially downgraded Pakistan from MSCI EM index to MSCI FM index, thus bringing an end to country’s 4yr long stay in the EM index. The decision was announced in the early morning hours and followed feedback received from market participants over reclassification.

The transition from EM to FM index will be a one step process and will coincide with Nov’21 Semi-Annual Index Review (SAIR). Simulated results show that this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.90%.

Market dataflow suggests that total AUMs in EM currently stand at US$1.8trn whereas the total AUMs of FM currently stand at US$15bn. Therefore, given the weight Pakistan had in EM and likely weight it will have in FM, the net outflow will settle around US$70mn – US$80mn. Further flows may be unlocked upon classification in MSCI FM 100 index and 15% Country Capped Index.

Market might take a knee-jerk reaction in the immediate aftermath of the classification but the reclassification comes with a potential silver lining owing to Pakistan’s increased weight in FM index (~1.9%) and FM100 index (~5.5%) as opposed to a cumulative weight of 2bps in MSCI EM index. Once the early jitters subside, the benchmark may post a solid price performance on the back of strong fundamentals (D/Y: 7.8% and PER: 5.7x).