In a major surprise, the MSCI on Friday proposed to downgrade the Pakistan Stock Exchange (PSX) to its Frontier Markets (FM) Index in November 2021 from the Emerging Markets (EM) Index at present.

As an immediate reaction to the potential move, local and foreign investors may resort to panic selling of shares at the domestic stock market and new investors might assume fresh positions across the board.

“The (final) decision in this regard (the MSCI proposal) will be announced on September 7, 2021,” Arif Habib Limited Head of Research Tahir Abbas in a commentary.

The MSCI is expected to discuss the potential reclassification with market participants till August 31, 2021.

“The reason for potential reclassification is the steady decline in market capitalisation of Pakistan’s constituents (companies listed at PSX) since 2017 leading to ineligibility of the stock market in meeting the criteria for market classification framework for Emerging Markets (EM) Index,” he cited MSCI.

Moreover, the index continuity rule has been applied for MSCI Pakistan since November 2018 to artificially maintain the MSCI Pak index in Emerging Markets.

Since November 2019, none of the three companies in MSCI EM have managed to meet the emerging market classification framework.

“Due to this, MSCI has proposed to reclassify MSCI Pakistan to Frontier Markets Index,” he said.

Pakistan was upgraded to MSCI Emerging Markets Index in May 2017 after a gap of nine years.

On Friday, the benchmark KSE-100 Index closed the first session at 47,791.90 points after a loss of 170.64 points or 0.36%.

The simulated index for MSCI Pak FM will have a total of 23 companies including four mid cap and 19 small cap firms compared to 16 companies in MSCI Pak EM (3 mid cap and 13 small cap), Abbas said.

The four mid cap companies in MSCI Pak FM include Lucky Cement, MCB Bank, HBL and Oil and Gas Development Company.

The MSCI Pak FM would have a weight of 2.3% in MSCI Frontier Markets index and 5.8% in MSCI Frontier Markets 100 index.

The 19 small cap of simulated MSCI Pak FM will include Pakistan Petroleum Limited, Mari Petroleum, Engro Corporation, UBL, Fauji Fertiliser Company, Pakistan Oilfields Limited, Pakistan State Oil, Hub Power Company, Indus Motor Company, Engro Fertiliser, TRG Pakistan, Bank Al Habib Limited and Abbott Laboratories.

Moreover, National Bank of Pakistan, Systems Limited, Millat Tractors Limited, The Searle Company Limited, Bank Alfalah Limited and Packages Limited are also part of 19 small cap firms.

“MSCI proposed to apply minimum size requirement for smaller FM and minimum liquidity requirement for average liquidity market (ATVR at 15%),” he said. 

To recall, the market classification framework for MSCI FM is full market capitalisation of $1.17 billion, free float market capitalisation of $88 million and average liquidity market (ATVR) at 2.5% compared to MSCI EM criteria of full market capitalisation at $2.34 billion, free float market capitalisation at $1.17 billion and ATVR of 15%.