By Faseeh Mangi
Pakistans inclusion in the MSCI Incs emerging-market indices has come under a cloud as the nations stocks fall below the market-size threshold.
The South Asian nation, which got promoted from a frontier nation in June 2017, has erased about $44 billion of equity value since then. That has narrowed its weight in the MSCI Emerging Markets Index to just above 3 basis points, lower than the 8 basis points Morocco and Jordan had when they were downgraded, according to EFG-Hermes Holding.
Thats not all. Habib Bank, one of the three stocks in the MSCIs Pakistan gauge, now has a market capitalisation below $1.6 billion. The MSCI usually requires at least three stocks to remain above that level for a country to maintain the emerging-market status. Also, none of the three stocks fulfills the free-float requirement.
All this means there is a “50 percent probability Pakistan will be put on review in June” for a downgrade, Mohamad Al Hajj, an equities strategist at EFG-Hermes, said by phone. “If it happens, it will be the fastest upgrade and downgrade.”
This does not mean a demotion is imminent. MSCI, whose indices are tracked by global investors to make investment decisions, doesnt react to every change in market value or take decisions based on a single characteristic.
“MSCI may decide to keep the market for some time within the same status, while keeping three constituents using the index continuity rule,” the index provider said in an emailed response to questions. “Secondly, the final decision to reclassify could be made following a public consultation.”
Pakistan gained back its emerging-market status after convincing global investors of its economic reforms and market access. Even though investors including Mark Mobius expressed scepticism about the promotion, the nations policy makers expected it to help attract global capital and deepen funding access for local businesses.
Ugly Surprise
It turned out to be a case of small fish in a big pond for Pakistan. With a negligible weight, Pakistan failed to attract the much-touted investment flows. The upgrade was followed by the Karachi market witnessing the worst foreign selling since the 2008 financial crisis and a currency depreciation that pushed its benchmark index to the worlds second-worst performer.
The nation had been added to MSCI Emerging Markets Index with six companies, but three were removed after falling below the market-value threshold.
“When an index contains less than three securities, then the next largest securities by free float-adjusted market capitalisation may be added to the Standard Index,” MSCI said.
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