KARACHI:  Morgan Stanley Composite Index (MSCI) has upgraded Pakistan Market from MSCI Frontier Markets (FM) Index to MSCI Emerging Markets (EM) Index. This will be effective from May 2017.

After this announcement by MSCI, the benchmark 100-share Index of Pakistan Stock Exchange (PSX) Wednesday gained 1042.13 points in a day trading or (2.3 per cent) and closed at 38559.88 points compared to previous closing of 37517.75 points.

The index recorded its biggest single-day gain since March 31, 2015, and is one of Asia’s best performers this year.

Research firms estimate the MSCI upgrade will result in about $400 million in inflows into Pakistan’s stock market by passive tracker funds alone.

Pakistan remained in MSCI EM Index during 1994-2007, but was removed in Dec 2008 due to price floor. In May 2009, Pakistan was shifted from standalone to FM Index. Due to change in local rules, stock exchange cannot close the market now.

Pakistan met all quantitative and qualitative criteria for up-gradation to MSCI EM. In today’s Webinar, MSCI said that in terms of quantitative criteria, which are market size and liquidity, Pakistan showed significant improvement during last few years. This helped lead to Pakistan’s market reclassification to EM.

The following nine companies are to be included in MSCI EM as per today’s Webinar, Oil & Gas Development (OGDC), Habib Bank (HBL), MCB Bank (MCB), United Bank (UBL), Lucky Cement (LUCK), Fauji Fertilizer (FFC), Engro Corporation (ENGRO), Hub-Power Co (HUBC) and Pakistan State Oil Co (PSO). The simulated MSCI Pakistan Investible Market Index (IMI) has 27 companies.

Pakistan has to sustain the overall economic recovery along with quality listings of large float companies, topline brokerage house said.

 Pakistan has 9.0 per cent weight in MSCI FM Index and 9.7 per cent in MSCI FM Small Cap Index. As per MSCI Webinar today, Pakistan’s weight in MSCI EM will be 0.2 per cent. Pakistan will be amongst one of the smallest country in MSCI EM along with Egypt and Czech Republic, which are also 0.2 per cent.

In Asian FM, Pakistan was part of Sri Lanka, Bangladesh and Vietnam. Now in Asian EM, Pakistan will be part of 8 other countries like China, Korea, Taiwan, India and Malaysia etc.

Although Pakistan’s weight in EM is much smaller, funds tracking EM ($1.4-1.7 trillion) are much larger than funds tracking FM ($17-20 billion). The analyst suggests gross inflow of $600 million by EM passive funds. In today’s Webinar, MSCI was of the view that flows in Pakistan market due to EM upgrade will most likely increase.

According to Topline research report, this market reclassification is expected to trigger rebound in Pakistan market from current forward PE of 8.7x vs MSCI EM PE of 12.3x. This is based on similar upsurges witnessed by Qatar and United Arab Emirates (UAE) markets, which were up around 40 per centin 12 months following announcement of reclassification to EM. Consequently, Qatar and UAE Market’s PE improved from 10.8x and 10.2x to 17.1x and 15.2x respectively.

It is interesting to see that it took Qatar and UAE markets 5 years from date of intention to be included in EM. The delay was because of implementation of delivery vs. payment settlement mechanism and limits on foreign ownership in these markets.  There were no such issues in Pakistan Market.

The analyst said even though Pakistan’s share is significantly lower in EM compared to FM, its improving macros and upside from China Pakistan Economic Corridor (CPEC) will prove to be compelling story in EM universe. This should attract investors despite its relatively small size.