As Pakistan Moves Back To Emerging Market Status After Year of Anticipation, Outflows Now Expected 2

MSCI classifies Pakistan as “Emerging market”

US-based MSCI has assigned emerging market (EEM) status to Pakistan (PAK) in its semi-annual review after classifying it as a frontier market for the past nine years. In a press bulletin, they stated, “MSCI will reclassify the MSCI Pakistan Indexes from Frontier Markets to Emerging Markets at the May 2017 Semi-Annual Index Review”. Pakistan will carry a weight of 0.1% in the MSCI Emerging Markets Index. The three largest components of the MSCI Pakistan Index are Habib Bank, United Bank, and Lucky Cement. These three stocks have weights of 23.7%, 17.8%, and 16.9% respectively. While investors mimicking the index may consider Pakistan’s weight in the index small, it should not be ignored. Pakistan’s stock markets (KSE) were the best performing Asian market in 2016 surging 46%.

Pakistan was a part of the MSCI Emerging Market Index from 1994 to 2008 but was dropped to a frontier market. Since news of the upgrade surfaced in June 2016, Pakistan’s benchmark Index – the Karachi Stock Exchange 100 Index (KSE-100 Index) has climbed 45% and has touched all time highs.

Analyst Shahab Farooq at Elixir Securities expects flows of $300 million to Pakistan after the inclusion. “However, taking cues from recent inclusion in the FTSE (the Financial Times Stock Exchange) indices, muted net flows in the near-term may be witnessed as global portfolio managers realign their portfolios,” he stated. Atif Zafar of JS Global said, “Despite the upgrade, foreign investors remained major sellers in the market with net outflows of $339 million in 2016 and $223 million during 2017 so far,” he added. “With MSCI upgrade, pick-up in foreign inflows is likely to lift the sentiments of the market.” Inflows to the Global X MSCI Pakistan ETF were  $37.6 million in 2016 and $33 million YTD in 2017.

Frontier market ETFs have turned risky?

While reclassification of Pakistan as an emerging market is positive for investors interested in Pakistan, it may have made frontier market ETFs mildly riskier investments. Pakistan was one of the largest and most liquid markets among the frontier markets.

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