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MSCI to Downgrade PSX to Frontier Markets

by Staff Report

File photo. Rizwan Tabassum—AFP

Four years after elevating it to an Emerging Market, investment advice body returns Pakistan Stock Exchange to a Frontier Market

Morgan Stanley Capital International (MSCI) on Tuesday announced an intent to reclassify the MSCI Pakistan Indexes from Emerging Markets to Frontier Markets.

Pakistan had been upgraded to an Emerging Market in 2017 on the basis of improved market access and economic reforms taken up by the Pakistan Muslim League (Nawaz) government. While the government had hailed the development as an opportunity to promote the Pakistan Stock Exchange, independent analysts had warned that the country’s economy did not support the move.

Tuesday’s announcement by MSCI—a leading provider of critical decision support tools and services for the global investment community—follows on a June declaration that it would downgrade the Pakistan Stock Exchange from EM to FM due to a continuous decline in the share price of its listed firms. It said that prior to the decision, it had received feedback from market participants during consultation on a market reclassification proposal for the MSCI Pakistan Index.

“MSCI will reclassify the MSCI Pakistan Indexes from Emerging Markets to Frontier Markets in one step, coinciding with the November 2021 Semi-Annual Index Review,” it said, adding that this would “lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.9%.”

Acknowledging that Pakistan’s equity market meets the requirements for market accessibility under the classification framework for emerging markets, MSCI said it no longer meets the standards for size and liquidity. “More specifically, index continuity rules … have been applied since the November 2018 Semi-Annual Index Review to maintain the required three constituents in the MSCI Pakistan Index. Since the November 2019 SAIR, there have been no securities in the MSCI Pakistan equity universe that meet the Emerging Markets Size and Liquidity criteria within the MSCI Market Classification Framework,” it added.

Analysts believe that local and foreign investors might resort to panic selling of shares at the stock market in the short-term, but should be countered by the induction of new investors in the medium to long-terms. They also claim that reclassifying the PSX could boost the number of foreign investors, as market participants believe Pakistan is more suited to the Frontier Markets Index.

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