MSCI Preview: All’s well yet nothing’s well

November 3, 2020 (MLN): Pakistan’s status as an Emerging Market in the next Semi-Annual Index Review by the Morgan Stanley Capital International (MSCI) on November 10, 2020, is likely to remain unchanged owing to the substandard performance of the stocks in the standard index.

While the performance of the stock markets in Pakistan has followed the same trajectory as the MSCI EM index, the country’s constituents in the main index have underperformed as they delivered a return of 20% as compared to the 28% return generated by the EM index.

This underperformance is one of the reasons why Pakistan’s weightage, which was at 0.14% at the time of its inclusion in 2017, is likely to shrink further to 0.02%, as reported by Ismail Iqbal Securities. Having such a low weightage in the index is also the reason why Pakistan has been unable to attach any foreign inflows. The very reason why the country is being allowed to remain in the index with such a trivial weightage is the index continuity rule which was implemented in May 2019.   

The position of Pakistan in the index can be further challenged by looking at the performance of three of its stocks in the MSCI Standard Index i.e. OGDC, MCB, and HBL, none of which have managed to meet the free-float market cap criteria. OGDC, however, meets the full market cap criteria, whereas HBL meets the free float criteria only if the 2/3^rd buffer rule is applied.

Besides, it is highly certain that no additions will be made to the Standard Index due to the inability of any other Pakistani stock to meet the inclusion criteria. On the other hand, no deletion is likely as the continuity rule requires a maximum of three stocks in the Standard Index.

Similarly, no changes are expected in the small-cap index, but there is a slight possibility that MEBL shall replace PKGS as it meets the market cap criteria better than the latter.

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