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Pakistan’s Post MSCI Reclassification to bring $500 Million in Foreign Investment

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Pakistani finance sector may be looking at a foreign portfolio investment of around $500 million which may be possible by converting of Pakistan’s status from Frontier Market (FM) to Emerging Market (EM) by MSCI in the upcoming Annual Market Classification Review.

What is MSCI?

MSCI is a provider of international investment decision support tools. An index created for the measuring of market performance based on equity in the global emerging markets by Morgan Stanley Capital International. The MCSI based review predicts global index assets worth more than $9.5 trillion.

What Happens with an EM Status?

This MCSI Pakistan Index included in the Annual Review for 2016 will happen in May and if the prior mentioned classification is achieved by Pakistan then there can be greater foreign interest and increased foreign investment.

Pakistan is at present a Frontier Market and Emerging Markets have greater potential for investors which generally is a good investment opportunity. Using these indices, a balanced portfolio is created to get maximum returns and keeping the risk small.

What Made Pakistan An Investor-Friendly Market?

Pakistan Stock Exchange was formed by the merging of three local stock exchanges and came into running few weeks back which was a measure to improve the country’s pliability to global market fluctuations hence reducing the risk factor for investors.

The formation of a single national stock exchange will send a positive message abroad and attract more foreign investors in the country’s capital market. – Mr. Ishaq Dar, Finance Minister (Pakistan)

The Securities and Exchange Commission of Pakistan (SECP), as the capital market regulator, has also endorsed the merger of these stock exchanges. SECP Chairman, Zafar Hijazi, said that without the integration of these stock exchanges, no strategic investor could have come forward.

Now with the structural overhaul in place, the PSX must act as an effective frontline regulator, with complete segregation of its commercial and regulatory functions. The task will be done by a strong and a well governed Board of Governors. – Zafar Hijazi, Chairman, SECP

Pakistani businesses and stakeholders predict that foreign investments will increase with one stock exchange operating in the country and the continued development of the China-Pak Economic Corridor (CPEC).

Does Pakistan Qualify for EM Status and has it Happened Before?

Huge foreign sell-off was observed in 2015 which was that good for Pakistan as foreign sale was a major factor for the stock exchange’s flat performance. The net outflow was £317.3 million over the past 12 months while 2014 had a foreign inflow of $382 million which indicates the need stabilize and stop the downward trend quickly.

A short-lived closing of Karachi Stock Exchange made way to a declassification to a ‘stand alone country index’ of Pakistan which had an Emerging status between 1994 and 2008. It rose back and got the FM status in 2009 and maintained that level from then on. At present there are six companies in Pakistan which fulfil the requirements for an EM which needs market capitalization of $1.3 billion and a $670 million free float. There are nine more companies which are close to the target.

If approved, Pakistan’s MSCI Index weight will convert to 8.9% in FM to 0.17% in EM. Qatar and UAE had this classification change in the recent past seeing a god increase of investments. Pakistan may need local investors for taking much more interest in the market to become stable.

 

Tags : MSCI
Madhu

The author Madhu

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