Pakistan’s Post MSCI Reclassification to Bring $500 Million in Foreign Investment

Pakistani businessmen and stock market could be up for a massive inflow of foreign portfolio investment of close to $500 million. The windfall could come from the conversion of Pakistan’s status from Frontier Market (FM) to Emerging Market (EM) by the MSCI in its upcoming Annual Market Classification Review.

What is MSCI?

MSCI is the leading provider of international investment decision support tools. It is an index created by Morgan Stanley Capital International (MSCI) that is designed to measure market performance based on equity in the global emerging markets. The MSCI based review benchmarks global index assets worth more than $9.5 trillion.

What Happens with an EM Status?

The MSCI Pakistan Index has been included in the Annual Review for 2016. The annual review will take place in May this year. Should Pakistan achieve the aforementioned classification, the country can expect significantly greater foreign interest and increased foreign investment.

Pakistan currently has the status of a Frontier Market. Emerging Markets show greater potential for investors and generally prove to be a good investment opportunity. These sort of MSCI indices are used to create a balanced portfolio so that maximum returns can be achieved while keeping the risk factor to a minimum.

What Made Pakistan An Investor-Friendly Market?

Pakistan Stock Exchange started its operations a few weeks ago after the merger of three local stock exchanges. It was a step towards improving the country’s resilience to changes in global market fluctuations, thus reducing the risk factor for investors.

The formation of a single national stock exchange will send a positive message abroad and attract more foreign investors in the country’s capital market. – Mr. Ishaq Dar, Finance Minister (Pakistan)

The Securities and Exchange Commission of Pakistan (SECP), as the capital market regulator, has also endorsed the merger of these stock exchanges. SECP Chairman, Zafar Hijazi, said that without the integration of these stock exchanges, no strategic investor could have come forward.

Now with the structural overhaul in place, the PSX must act as an effective frontline regulator, with complete segregation of its commercial and regulatory functions. The task will be done by a strong and a well governed Board of Governors. – Zafar Hijazi, Chairman, SECP

Pakistani businesses and stakeholders are much more optimistic that foreign investments will increase with one stock exchange operating in the country and the continued development of the China-Pak Economic Corridor (CPEC).

Does Pakistan Qualify for EM Status and Has it Happened Before?

2015 was not all that great for the Pakistani bourses as massive foreign sell-off was seen during the period. In fact, foreign selling was one of the major factors behind the stock exchange’s flat performance. A net outflow of £317.3 million was seen over the past 12 months, whereas 2014 saw a foreign inflow of $382.5 million. The market needs to stabilize and end the downward trend as soon as possible.

Pakistan had an Emerging status between 1994 and 2008 but the short-lived closure of Karachi Stock Exchange led to a declassification to a ‘standalone country index’. It regained the FM status in 2009 and remained at that level ever since. Currently, six Pakistani companies satisfy the criteria for an Emerging Market (EM) which requires market capitalization of $1.3 billion and a free float of $670 million. Nine other companies are close to the mentioned target.

If approved, Pakistan’s MSCI Index weight will convert to 8.9% in FM to 0.17% in EM. Qatar and UAE underwent the classification change recently and saw a dramatic increase in investments. However, Pakistan will require local investors to take more interest for the market to become even more resilient and stable.

He is the Editor at ProPakistani. Reach him at [email protected]