Pakistan likely to face up to $150m outflows after FTSE Russell's downgrade

September 16, 2024 (MLN): Pakistan may experience potential passive foreign outflows of approximately $50 million to $150m, following FTSE Russell's downgrade of the country from secondary emerging market to frontier status, according to a recent report by KTrade Research.

To note, the downgrade will take effect on September 23, 2024.

Vanguard is the largest passive institutional money manager in Pakistan tracking FTSE benchmarks with multiple funds and class offerings under each fund series.

The brokerage house believes passive outflows could be near the lower end of the range of $50m to $75mn as select funds reflect off benchmark frontier and unclassified markets.

The broader market decline down 1% yesterday is an over-reaction in their view where the release of passive flows should provide active foreign institutions and rotation-led domestic institutions the opportunity to increase allocations with lower price impacts as the market trades at an undemanding 4x forward earnings.

Vanguard Funds tracking the FTSE Emerging Markets All Cap China A Inclusion Index are likely to unwind positions in Pakistan in our view ($53.6m).

However, funds tracking FTSE Global All Cap ex US Index and FTSE Global Small Cap ex US Index could recalibrate weight and positions considering the funds off benchmark holdings.

FTSE Global All Cap Ex US Index comprises large-mid-small cap stocks globally while the FTSE Global Small Cap Ex US Index is a market capitalization-weighted index.

Indices represent companies and markets from developed and emerging markets and are derived from the FTSE Global Equity Index Series (GEIS) covering 98% of the world’s investable market capitalization.

"Pakistan constituents in the FTSE GEIS will be removed in conjunction with the September 24 review however Pakistan will be accounted for in the Frontier Index Series review on 23rd Aug’24 based on our discussion with FTSE Russell," the report further noted.

The FTSE Frontier Index Series is separate from but compatible with the FTSE GEIS for a wider global investment universe.

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