MSCI’s move to promote Pakistan to emerging market to prompt more money flow

Index provider Morgan Stanley Capital International’s (MSCI) recent reclassification of Pakistan as an emerging market from frontier market status is expected to prompt more money to flow into the country, according to a major American financial newspaper.

“Pakistan has gotten a leg up from the indexing world and could get more attention from investors because of it,” The Wall Street Journal said in a dispatch published Monday.

In May, index provider MSCI Inc. decided to give Pakistan emerging-market status and added it to the MSCI Emerging Markets Index. MSCI had previously classified Pakistan as a frontier market.

The newspaper explained that emerging markets are more economically developed than frontier markets by definition and generally are considered less risky by investors. Much more money is invested in funds that track emerging-markets indexes than in those that track frontier-markets indexes.

“The great thing about being added to an index is that pretty soon there will be inflows of money to the country,” Satya Patel, a portfolio manager at Matthews Asia in San Francisco, was quoted as saying in the diapatch. For one thing, when a country was added to an index, funds that aim to track that index need to buy stocks in that country.

“In this case, they will sell dollars and buy Pakistani rupees in order to buy the local stocks,” he said. 

“Ultimately, the inflow of foreign currency helps stabilize a country’s economy, he added. Having a sizable stash of foreign currency typically helps a country maintain the flow of imports and support the home currency on world markets,” the Journal pointed out. It also provides reserves for possible use in an economic or political crisis, which can help reassure foreign investors that their money is safe in the country.

Patel said, “Pakistan’s new status also may help draw attention to the investment opportunities there, aside from index-related purchases.”

“One of the most surprising things is that Pakistani companies are the best-run companies in Asia,” he says. “Part of that has to do with that they have operated in a challenging environment for the past few decades.”