KARACHI: In a surprise move, global index provider MSCI is weighing options to demote Pakistan back to Frontier Markets (FM) from Emerging markets (EM).

An MSCI document released on Friday said that consultations with market participants had begun which would continue till Aug 31 and the decision would be announced on Sept 7.

The downgrade would coincide with the Nov 2021 Semi-Annual Index Review and comes about because the number of companies in Pakistan that meet the size and liquidity criterion for placement on the MSCI EM is below the minimum of three.

The MSCI FM Index is simulated to have four constituents — Lucky Cement, HBL, MCB Bank and OGDC. At the moment, the MSCI EM Small Cap Index has 13 constituents while there would be 19 constituents in the MSCI FM Small Cap Index.

Many market participants have continued to advocate that Pakistan was much better off in the FM.

Arif Habib, former chairman of the exchange, said that it was never a great idea to shift to the MSCI EM from FM in the first place.

“Due to the heavier weightage in FM, the Pakistan market was able to attract passive funds with net investments into the local market. It has been the other way round since the entry into MSCI EM with persistent foreign outflows”, he said.

The weight of the MSCI Pakistan Index in the MSCI EM index stands at a miniscule 0.02pc.

Pakistan is likely to have simulated weight of 5.8pc in the FM 100 index. It was 8.5pc when market participants, brokers and fund managers put their heart and soul behind Pakistan market’s upgrade to EM on the premise that the country’s market would attract inflows of $300-$500m from global players who invest through EM index Funds. But the expectations turned sour and the market saw massive outflows on May 31, 2017 — the day of upgrade to EM.

Investors who had bought a huge amount of stocks on drummed-up ideas of the fund managers found themselves trapped as the KSE-100 index tanked from an all-time high of 53,124 points on May 25, 2017 to 37,919 points in a matter of seven months. Four years on, the index is yet to recover fully from the great fall.

Topline Securities said in its report released on Friday that though the potential inflows and outflows from return to FM, remain early estimates and may largely net off “we believe the reclassification to FM from EM may turn out to be beneficial for Pakistan in terms of increasing visibility amongst foreign participants’’.

It observed that in a survey conducted with foreign investors, half of those questioned believe the development to be positive; 25pc looked at mixed implications while another quarter of foreign investors termed it negative for Pakistan equities.

Published in Dawn, June 26th, 2021