AKD Quotidian about — Weight gain for Pakistan in MSCI FM Index!

Karachi, June 12, 2013 (PPI-OT): MSCI has confirmed that effective May’14, Qatar (16.8% weight in FM) and UAE (12.4% weight in FM) will be reclassified as Emerging Markets from Frontier Markets presently while Morocco will be classified as a Frontier Market in the Nov’13 semi-annual index review.

According to AKD Securities considering the combined weight of 29% for Qatar and UAE, the remaining constituents in the Frontier Markets space will likely witness increased weight where we estimate that Pakistan’s weight in the MSCI Frontier Market Index may increase up to 7% from 5% at present, implying positives for the broader market in general and blue-chips in particular.

Going forward, while Pakistan has not yet been considered for review for a potential upgrade to Emerging Markets status it already meets the quantitative criteria for elevation. Moreover, considering qualitative criteria does not appear to be particularly stringent, Pakistan’s history of being part of the MSCI Emerging Market Index prior to 2008 (albeit with a small 0.12% weight) and the ongoing uptick in activity at the KSE-100 (CY13TD volumes: 262mn shares; value: US$86mn; net FPI: US$400mn), we believe the case for an upgrade will only become stronger going forward.

Weight gain for Pakistan! MSCI has confirmed that Qatar and UAE will be reclassified as Emerging Markets, effective May’14 while Morocco will be classified as a Frontier Market in the Nov’13 semi-annual index review. Considering the combined weight of 29% for Qatar and UAE, the remaining constituents in the Frontier Markets space will likely witness increased weight despite Morocco’s inclusion, consequently leading to higher basket allocations.

In this regard, we estimate that Pakistan’s weight in the MSCI Frontier Market Index may increase up to 7% from 5% at present. Pakistani companies that are presently part of the FM 100 are OGDC, MCB, FFC, POL, ENGRO, UBL, PPL, NBP, HUBC and PSO.

Pakistan-case for an upgrade? Post the imposition of the price floor across Aug’O8-Dec’08, Pakistan was removed from the MSCI Emerging Market Index in Dec’08 and maintained as a standalone country index. Pakistan was later made part of the MSCI Frontier Market Index in May’09 and has remained within that classification for more than 4yrs now.

While Pakistan was not considered for upgrade in the recently conducted MSCI Annual Market Classification Review, we believe a case may be made for elevation going forward where Pakistan’s companies meets the quantitative criteria for upgrade (four companies needed with market cap of US$101 bn; free float market cap of US$505mn and 15% AVTR).

While Pakistan has not yet been considered for review for a potential upgrade to Emerging Markets status, we believe the case for an upgrade will only become stronger going forward. In this regard, since 2008 the Frontier Market Index has on average traded at a 17% discount to the Emerging Market Index, pointing to positive for valuation rerating.

More needed for upgrade: Pakistan’s upgrade appears to rest on meeting qualitative criteria which pertains to 1) openness for foreign ownership, 2) ease of capital flows, 3) efficiency of operational framework and 4) stability of institutional framework. In this regard, according to the MSCI Global Market

Accessibility Review, Pakistan needs to do more on fx market liberalization (e.g. no alternative to SCRA), streamlining investor account setup and 3) providing overdraft facilities on clearing and settlement.

More importantly however, Pakistan appears to still be suffering from the decision to place a price floor during Aug’08-Dec08 even as market voluiries and value have recently picked up considerably (CY13TD volumes: 262mn shares; value: US$86mn; net EPI: US$400mn)

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