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Capital market upgrade

September 03, 2012


A CAPITAL market delegation would leave for London today to persuade the Morgan Stanley Capital International to re-enter Pakistan into its ‘Emerging Markets Index.’

The discussions with the rating agency, that provides investment decision tools (including ratings) worldwide, would centre on convincing the MSCI to upgrade Pakistani market from ‘Frontier’ to ‘Emerging’ market—a status that it enjoyed for 14 years from 1994 to 2008.

The MSCI downgraded Pakistan on May 29, 2009 following a market crash in April 2008 and fixing of ‘floor’ considered by foreigners a ‘violation of free market principle.’

As the great market crash sent Pakistan equities scurrying down by 42 per cent, the regulators’ took an unlikely decision of putting a ‘floor’ so as to cap the downside. The ‘floor’ blocked the exit, mainly of the panic prone herd of foreign investors. After the planks were pulled from under the ‘floor’, overseas investors in equities made a dash to the door, carrying with them much of the $2.5 billion invested in the country’s equity markets.

And the MSCI downgraded Pakistan from ‘Emerging’ to ‘Frontier’ markets with a curt remark: “The Pakistani equity market suffers from deteriorated invest ability conditions”. The KSE-100 index at the time stood at 6,022 points.

“The MSCI is generally believed to be used by top global fund managers to track a stock exchange’s position and make fund allocations accordingly”, the managing director of the Karachi Stock Exchange, Mr Nadeem Naqvi, told this scribe.

He said that the Fund managers in developed markets, such as the G8 countries choose to invest pension funds in the Emerging Markets, while avoiding the Frontier Markets. The re-entry of Pakistan into the Emerging Markets would appear as an attractive spot on the radar screen of foreign investors, the KSE MD said.

Over the last two-and-a-half years, the investors in equities seem to have brushed off the memory of the great market turmoil as a bad dream. Local institutional investors, foreign funds and even the retail investors who had burnt their fingers in the fire that raged over the KSE in 2009, are back to trading.

There are many reasons for the capital market leaders to be optimistic about the re-entry of Pakistan into the Emerging Markets. It is fuelled also by the fact that in spite of giving a negative return in 2011, the Pakistani market was one of the best performing among regional markets. And in the current year, it has outperformed almost all equity markets. The benchmark KSE-100 index is just a stone’s throw from its best ever April 20, 2008 level of 15,737 points and is still rising. As the market is set to make a historic high next week, investors, especially in second and third tier stocks do not seem to be looking at what they were picking, but grabbing whichever stocks they could lay their hands on.

The timing, therefore, is appropriate for approaching the MSCI for consideration of Pakistan’s re-entry into the ‘Emerging Markets.’ The KSE MD, Mr Nadeem Naqvi, however, cautioned that there would be no immediate change. “The next review by MSCI is due in June next year, when Pakistani markets may come under consideration”, he observed.

But the MD KSE said that the delegation would prove to the MSCI officials that the Pakistani market had grown to the size requirements set for Emerging Markets; that it meets accessibility, free float and liquidity criteria and that the highest standards of corporate governance have been introduced by the regulators.