In a significant development for Pakistan’s financial markets, Morgan Stanley Capital International (MSCI) Inc. has announced the inclusion of seven Pakistani companies in its Frontier Market (FM) Index and FM Small Cap Indexes as part of its August 2024 index review. These changes are set to take effect at the close of trading on August 30, 2024.
New Additions to MSCI Frontier Market Indexes
Among the new additions, Sazgar Engineering Works has been included in the prestigious MSCI Frontier Market Index. This inclusion is seen as a notable achievement, reflecting the company’s growing market presence and financial performance.
In the MSCI FM Small Cap Indexes, six Pakistani companies have been newly added, underscoring the increasing prominence of Pakistani firms in the global investment landscape. The companies added are:
- Atlas Battery
- Ghandhara Automobiles
- Habib Sugar Mills
- Lotte Chemical Pakistan
- Octopus Digital
- Soneri Bank
These inclusions are expected to enhance the visibility of these companies among global investors, potentially attracting increased foreign investment into Pakistan’s stock market.
Deletions from MSCI FM Small Cap Indexes
While there were new additions, MSCI also announced the removal of two Pakistani companies from the MSCI FM Small Cap Indexes. These companies are:
- HASCOL Petroleum
- Sazgar Engineering Works (despite being added to the Frontier Market Index, it was removed from the Small Cap Indexes)
The adjustments reflect the dynamic nature of the global investment environment, where companies are evaluated based on performance, market capitalization, and other factors influencing their eligibility for inclusion in these indexes.
Implications for Pakistan’s Market Weight and Inflows
Earlier this month, Topline Securities, a leading brokerage house in Pakistan, projected an increase in Pakistan’s weight within the MSCI Frontier Market Index following the August 2024 review. According to their analysis, Pakistan’s weight could rise by 35-45 basis points (bps), potentially increasing from the current 4.2-4.3% to 4.7-4.8%. This increase in weight, coupled with the addition of new companies, could lead to significant inflows into the Pakistani market.
Topline Securities estimated that the expected increase in weight, assuming Assets Under Management (AUM) size of $5-10 billion tracking the MSCI FM Index, could result in gross inflows of approximately $20-45 million. Such inflows would be a welcome boost for Pakistan’s economy, providing additional liquidity and investment in the stock market.
Background and Context
Pakistan’s journey with MSCI has seen several shifts over the years. In September 2021, MSCI downgraded Pakistan from its status as an Emerging Market, a little over four years after it had been upgraded from the Frontier Markets (FM) Index. The downgrade was attributed to the Pakistani equity market’s failure to meet the standards for size and liquidity required for Emerging Markets, despite meeting the requirements for market accessibility.
The recent additions of Pakistani companies to the MSCI Frontier Market Indexes in August 2024 represent a positive step forward for Pakistan’s market and economy, potentially reversing some of the setbacks experienced in recent years. The increased visibility and investment potential are expected to benefit the included companies and the broader Pakistani market, reinforcing its importance in the global investment landscape.
