- Pakistan upgraded to emerging market from frontier status
- Karachi Stock Exchange KSE100 Index has rallied 14% in 2016
Pakistan’s stock market, which has risen the most in Asia this year, could be in for an additional boost after MSCI Inc. said it will include the nation’s equities in its benchmark emerging-market index for the first time since 2008.
The index provider said the MSCI Pakistan Index will be reclassified to emerging-market status, coinciding with its May 2017 semi-annual index review. EFG Hermes said last month that an upgrade could lure around $475 million of inflows by the middle of next year. The country’s benchmark index rallied the most in five weeks before MSCI’s decision late Tuesday in New York.
“Pakistan is moving into acceptance: the nation has what it needs, a decently functional state and decent stability,” Mattias Martinsson, the Stockholm-based chief investment officer at Tundra Fonder, which holds $200 million of Pakistani equities, said before the announcement.
Prime Minister Nawaz Sharif is seeking to boost economic growth to its fastest pace in more than a decade after achieving stability through an International Monetary Fund loan program that averted an external payments crisis in 2013. The nation also plans to end an energy crisis in two years with the help of $46 billion of planned Chinese investment. Even so, Pakistan may struggle to get much attention as an emerging market.
The Karachi Stock Exchange KSE100 Index has gained 15 percent this year, making it the best performer in Asia. The gauge has climbed 4.2 percent this month, compared with a 0.5 percent decline in the MSCI Emerging Markets Index.
Pakistan was downgraded to frontier status in December 2008, four months after the Karachi Stock Exchange imposed a rule that caused near total paralysis of market activity for more than three months. The bourse set an index floor to stop a plunge that wiped out $36.9 billion of market value in about four months after then military ruler Pervez Musharraf left office to avoid impeachment.
MSCI’s Frontier Markets Index currently features 16 Pakistani companies that make up about 9 percent of the gauge. Valuations on the nation’s stocks have fallen over the past year, and an upgrade to emerging-market status could spur a rally, Martinsson said.
The United Arab Emirates and Qatar -- the last two countries to be promoted to emerging-market status by MSCI -- saw their benchmark share gauges jump by at least a third in the 12 months following their addition in June 2013.
Among the companies MSCI plans to move to its emerging-markets indexes are drug maker Searle Co., which has already gained 51 percent this year, Pakistan Oilfields Ltd., with a 31 percent increase for 2016, and Maple Leaf Cement Factory Ltd., up 29 percent.
Frontier-market funds are likely to keep much of their exposure to Pakistan even if it regained emerging-market status, EFG Hermes said in a report last month.
“Pakistan’s market has been doing so well as valuations are some of the lowest in the region,” Arthur Kwong, the Hong Kong-based head of Asia-Pacific equities at BNP Paribas Investment Partners, which oversees about 552 billion euros ($619 billion), said before the MSCI announcement. “Basically people are looking for alternatives, finding markets that are less correlated to the U.S. interest-rate cycle and the China macro slowdown. Pakistan, no doubt, is one of the outstanding spots.”