KARACHI: Morgan Stanley Capital International upgraded the Pakistani bourse on Wednesday to its MSCI Emerging Markets Index from the frontier markets status.

The reclassification, which coincides with May 2017 semi-annual index review, will be effective from June 1, 2017.

Brokers and analysts, who were at the edge of their seats since Friday, were relieved as the MSCI pronounced its positive stance in early hours of Wednesday.

The decision by the MSCI, the leading provider of research-based indices and analytics that claims to cater to 97 out of top 100 largest international fund managers, came after extensive consultation with international fund managers, which finally led to Pakistan back in emerging markets (EM) after a gap of eight years.

Investors at the stock market jumped with joy on Wednesday as was evident in the day’s trading which saw the KSE-100 index accumulate massive gains of 1,042 points (up 2.78 per cent) and close at its all-time high of 38,560.

Market participants agreed that the MSCI decision boded well for the market as it would gain access to a larger pool of foreign funds tracking EM markets.

Nine companies have been shortlisted by the MSCI committee for probable inclusion in the MSCI EM Index. The companies include one large-cap firm, OGDC, while the remaining eight are mid-cap firms namely HBL, UBL, MCB, LUCK, ENGRO, FFC, HUBC and PSO.

Pakistan met all quantitative and qualitative criteria for the upgrade to MSCI EM Index. MSCI said in a statement that in terms of quantitative criteria, which are market size and liquidity, Pakistan showed significant improvement during the last few years. It helped lead to Pakistan’s market reclassification to emerging markets.

Pakistan has 9pc weight in MSCI Frontier Markets (FM) Index and 9.7pc in MSCI FM Small Cap Index. As per MSCI, Pakistan’s weight in MSCI EM would be 0.2pc, which would place it amongst the smallest country in the index, in company with Egypt and Czech Republic.

Although Pakistan’s weight in EM would be much smaller, funds tracking EM which are estimated to be around $1.4 trillion to $1.7tr are about 10 times larger than those that track the FM index amounting to $17 billion to $20bn.

However, the big question on everyone’s mind was: how much foreign inflow could be expected after the upgrade?

“Our back-of-envelope calculations suggest gross inflow of $600 million by EM passive funds,” predicted brokerage Topline Securities. “…We have come up with a broad range of $700-800m (inflows),” brokerage KASB Securities said in its report. Taurus Securities believed that the country was likely to witness foreign portfolio investment of $300-400m in the medium term.

“The market upgrade should bring in net flows of $600m-700m in a span of one year,” said analysts at Arif Habib Limited. “We estimate gross passive inflows of $500m upon formal inclusion,” stated AKD Securities.

Cool-minded calculation by certain major market players, however, suggested possible inflow of 0.2pc of the $1.5tr EM funds, which could amount to $250m.

Nasim Beg, vice-chairman of MCB Arif Habib Savings, said that huge global funds do not pick up individual stocks but indulge in “index investing” and although Pakistan’s weight might be reduced in EM, allocation would increase by passive funds. For international investing, bigger foreign funds track the MSCI indices.

Pakistan was part of the MSCI Emerging Markets Index for over 14 years from 1994 to 2008, when in the great global financial market crisis which spilled over into the local equity markets, regulators lost their nerve and imposed the infamous “floor” that virtually blocked the investors’ exit.

Perturbed by the unprecedented move, MSCI shifted Pakistan as “standalone country index”, where it remained till May 2009, when the MSCI moved the local index to the frontier markets.

Published in Dawn, June 16th, 2016