MSCI Preview: No change expected in main constituents

April 30, 2021 (MLN): Morgan Stanley Capital International (MSCI) is slated to announce the results of Semi-Annual Index Review on May 11, 2021 wherein no addition or deletion of stocks are expected from the Pakistan’s MSCI Main Index.

All changes will be implemented after the close of May 28, 2021.

According to the research report by Arif Habib Ltd (AHL), Pakistan’s equity market has recorded a decrease of 2.2% or 1,002 pts (USD-based return of +0.67%) since the last MSCI Semi-Annual Review back in February 2021.

As per the MSCI Global Index Methodology, the criteria for Emerging Markets includes $1,830mn in terms of total market capitalization while $915mn is required with regards to free float market capitalization along with 15% ATVR, AHL research said.   

Assuming the cut-off date of April 28, 2021 for the semi-annual review, OGDC fulfills the total market capitalization criteria while other constituents i.e., HBL and MCB are short by $650mn and $562mn, respectively. Whereas unfortunately, none of the constituents has been successful in meeting the required free-float capitalization criteria of $915mn, the research added.

However, given the applicability of the buffer rule (2/3 of benchmark criteria), on total market capitalization, OGDC and MCB are eligible while HBL is still short by $40mn. Moreover, for free float market cap, all three stocks are not eligible even after applying the buffer rule.

Translating the aforementioned buffer and index continuity rule, it is expected that no additions and deletions of stocks from the MSCI Main Index, said Tahir Abbas, Head of Research at AHL.

Looking at the scenario, there are increased chances of Pakistan being put on the monitoring list for a potential downgrade in the near future (potentially in the annual market reclassification review in Jun 21), Fahad Rauf, Head of Research at Ismail Iqbal Securities (IIS) wrote.

Based on index continuity rules, LUCK is likely to beat OGDC on a free-float market capitalization basis (even after applying a 1.5x factor to OGDC’s market cap), thus landing a place in the standard index, he added.

However, as per Topline research, LUCK is unlikely to meet the free market cap requirement of over $750mn. 'Pakistan’s weight is likely to remain around 0.02%', Syed Atif Zafar, Director Research & Chief Economist at Topline Securities estimated.

With regards to MSCI Global Small Cap Index, PKGS is likely to be deleted. In replacement, TRG looks to have a stronger case than MEBL based on most of the criteria. However, TRG price run-up has been rather extreme, which might restrict it from getting added in the current review, said Fahad Rauf.

To note, it had been expected that PKGS to be deleted in Nov 20 SAIR as well but it somehow managed to maintain its place, he concluded.

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Posted on: 2021-04-30T23:34:00+05:00