Karachi, September 08, 2021 (PPI-OT): MSCI reclassifies Pakistan to Frontier Market from Emerging Market; Implies Limited Market Impact
MSCI in its latest press release has downgraded Pakistan from Emerging Market Index to Frontier Market Index, coinciding with November 2021 Semi Annual Index Review.
For MSCI Frontier market index, only 4 securities namely LUCK, MCB, HBL and OGDC meet the classification standard. These will have a cumulative weight of 1.9% (2.3% as of April 2021).
Moreover, MSCI further seeks consultation to reclassify Pakistan in the list of eligible markets for MSCI Frontier Market 100 index and MSCI Frontier Markets 15% Country Capped Index.
In our view, barring the outgoing securities from MSCI Emerging Market LUCK, MCB and HBL, we see neutral impact on overall market.
MSCI reclassifies Pakistan to Frontier Market Index
Morgan Stanley Capital International (MSCI) earlier today, based on consultation on its Market Reclassification Proposal, has downgraded Pakistan from Emerging Market Index to Frontier Market Index, coinciding with November 2021 Semi Annual Index Review (SAIR).
Amid lack of market Size and Liquidity
According to MSCI, Pakistan meets requirements for Market Accessibility under Emerging Market Classification, but no longer meets the standards for Size and Liquidity. To recall, concerns on lack of Size and Liquidity have been identified since November 2018, but Pakistan remained in Emerging Market Classification under the Index Continuity rule which pertains to achieving basic level of diversification.
4 securities to be added from Pakistan in MSCI Frontier Market Index
As of May-21 consultation documents Pakistan has 3 securities in MSCI Emerging Market, LUCK, MCB and HBL with total size of USD 1.6bn constituting to a cumulative weight of 0.02%. For MSCI Frontier market index, only 4 securities namely LUCK, MCB, HBL and OGDC meet the classification standard. These will have a cumulative weight of 1.9% (2.3% as of April 2021).
Consultation to classify Pakistan in MSCI Frontier Market 100 Index
Moreover, MSCI further seeks consultation to reclassify Pakistan in the list of eligible markets for MSCI Frontier Market 100 index and MSCI Frontier Markets 15% Country Capped Index in its quarterly review later in by February, 2022. Under these two indices, stimulated market size of Pakistan is estimated at 5.8%.
Outlook
In our view, barring the outgoing securities from MSCI Emerging Market LUCK, MCB and HBL, we see neutral impact on overall market. Arguably the size of MSCI Emerging Market is much larger than MSCI Frontier, but Pakistan constitutes a smaller weight in Emerging Market. Hence in broader aspect, we believe domestic market will most likely be able to absorb much of the liquidity drain. As for MSCI Frontier Market, Pakistan trades at a significant discount, with respect to market multiples whereby Pakistan has a current P/E of 5.5x versus 16.5x, dividend yield of 6.7% versus 2.62% and P/B of 0.9x versus 2.2x. These discounts could potentially attract a larger share of frontier market interest.