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All eyes are set on Morgan Stanley Capital International (MSCI), which will announce whether or not Pakistan is reclassified from its Emerging Markets (EM) to the Frontier Markets (FM) Index, a decision expected early Wednesday morning.

Followers of the development and market talk suggest it is highly likely that Pakistan would be pushed back into the frontier markets.

Pakistan was promoted from a frontier nation to the status of an emerging market in June 2017 after it convinced global investors of its economic reforms and market access.

However, a gradual reduction in market capitalisation of the companies listed on the MSCI Pakistan EM Index has eventually landed it in a position where it could go back to where it was a few years ago — the FM Index.

Impact and direction

Mattias Martinsson, founding partner and Chief Investment Officer at Sweden-based Tundra Fonder, in a tweet post on Tuesday said MSCI is likely to announce Pakistan's downgrade, and its initial flows' impact would be small. The fund has assets under management worth $250 million that it has invested across different markets including the Pakistan Stock Exchange (PSX).

Muzammil Aslam, chief executive at Tangent Capital Advisors, said that the likely downgrade may cost a minor outflow worth $10-20 million.

MSCI to begin consultation on proposal to downgrade Pakistan

In June 2021, MSCI, whose indexes are tracked by global investors to make investment decisions, had said that it will begin consultation on a proposal for Pakistan's reclassification from Emerging Markets to Frontier Markets.

“Although the Pakistani equity market meets the requirements for Market Accessibility under the classification framework for Emerging Markets, it no longer meets the standards for Size and Liquidity,” it had said while announcing results of the MSCI 2021 Market Classification Review.

A recent report, titled 'Tundra Sustainable Frontier Fund', said a possible change of category could be positive for the market as Pakistan's low weight in the EM Index has meant that it has been largely ignored. The country's weightage has gone from 15 basis points to a mere 2 basis points over the course of 4 years it has stayed in the EM Index.

“The initial weight in the MSCI Frontier Index should be just over 2%, but given the market's liquidity and the attractive valuations, we believe active funds will have a higher weight than that,” said the report.

Potential downgrade to frontier markets could prove beneficial to capital market: experts

“Frontier markets and smaller emerging markets have received a well-deserved boost over the past twelve months, reminding investors that over time it is worth investing also outside the largest emerging markets.

“Not least, the positive aspects of diversifying your emerging market portfolio into frontier/smaller emerging markets have appeared in 2021, when the frontier category so far has outperformed the Emerging Markets category. Low valuations and good profit growth indicate that we are still early in a possible revaluation process,” it said.

The KSE-100 Index, the benchmark for PSX market performance, has already come under pressure over the widening trade deficit as well as rupee depreciation. It ended at a three-month low earlier on Tuesday.

KSE-100 falls another 189 points as MSCI decision looms

Along with pressure on the external trade front, discussions with the International Monetary Fund (IMF) over the sixth review under the Extended Fund Facility (EFF) programme are also ongoing. Market participants describe development on the IMF front crucial for future direction of the market as well as the currency that has lost close to 10% since May this year.


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