MSCI downgrades Pakistan to 'frontier market' after four years

Index provider MSCI Inc. downgraded Pakistan to a frontier market, four years after its ranking was raised to an emerging market.
 

“Although the Pakistani equity market meets the requirements for market accessibility under the classification framework for emerging markets, it no longer meets the standards for size and liquidity,” according to a statement by MSCI. The proposal is to be implemented with the November semi‐annual index review, MSCI said. 

The decision has been expected since Pakistan started falling below the MSCI’s criteria in terms of size and liquidity after its promotion to an emerging market in 2017. The South Asian nation’s benchmark KSE-100 Index rose to a record in the run up to the upgrade but slumped into a bear market soon after.

A corruption scandal involving then Prime Minister Nawaz Sharif sent foreigners on a selling spree. Overseas investors have sold shares worth more than $1 billion since the upgrade. The KSE-100 is down 12% from its record high and traded little changed at 10:05 a.m. local time in Karachi. 

“After Pakistan’s downgrade, passive investors will have to sell around $100 million worth of shares in total, when the change becomes effective,” Brian Freitas, a New Zealand-based analyst who publishes on independent research website Smartkarma, said by phone before the decision.

Pakistan has a weight of 0.02% in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. The MSCI Pakistan Index is made up of Lucky Cement Ltd., MCB Bank Ltd. and Habib Bank Ltd. Since Nov. 2019, none of them have met the size or liquidity criteria, MSCI said. 

The country’s shares will be a bigger presence in the MSCI Frontier Markets Index with a weight of 1.9%, according to an MSCI simulation. The change will see funds increase their Pakistan holding to 10% within a year, said Mattias Martinsson, chief investment officer of Tundra Fonder AB.

MSCI also launched the consultation on the potential inclusion of Pakistan to the MSCI Frontier Markets 100 Index and the MSCI Frontier Markets 15% Country Capped Index as part of its May review. 

“There is some excitement around the reclassification with the phrase ‘big fish in a small pond’ resurfacing but the pond has become smaller as funds tracking it have almost halved since 2016 to around $5 billion,” said Fahad Rauf, head of research at Ismail Iqbal Securities Pvt. “We do not expect any major inflows.”