MSCI relegates PSO to Frontier Markets Small Caps Index

By Kazim Alam, The Express Tribune

KARACHI: MSCI – a firm that provides global benchmark indices and risk management analytical products with equity coverage for more than 70 countries – has downgraded Pakistan State Oil (PSO) from the MSCI Frontier Markets Fund (FM) Index and added it to its MSCI FM Small Caps Index, according to the May 2013 semi-annual review of MSCI equity indices.

The MSCI FM Small Cap Index covers all investable small-cap securities in frontier markets, which feature as many as 31 countries across the world. “PSO has been added to the 15 Pakistani stocks in the MSCI FM Small Caps earlier, while Jahangir Siddiqui Company, Sui Northern Gas Pipelines and Lotte Chemicals Pakistan have been deleted,” Shagufta Irshad Khurram of KASB Securities said in a research note issued to clients on Thursday.

In total, the semi-annual review contains 31 additions to, and 22 deletions from, the MSCI Frontier Markets Small Cap Index.

The deletion of PSO, in addition to a 0.05% rise in the weightage given to Hubco and minor adjustments in weights for other stocks, has resulted in lowering the total weight of Pakistani stocks in the MSCI FM Index from 4.46% to 4.24%, Khurram added.

Therefore, as per their pro forma stock weights, Pakistani stocks represented in the MSCI FM Index will be Engro (0.21%), Fatima (0.05%), FFC (0.54%), Hubco (0.22%), MCB (1.04%), NBP (0.19%), OGDC (1.17%), POL (0.29%), PPL (0.20%), PTC (0.07%) and UBL (0.25%).

The MSCI Global Equity Indices for developed markets (DM), emerging markets (EM) and frontier markets (FM) are global equity benchmarks that are used internationally by over 6,000 clients, which include large pension plans and hedge funds, according to the MSCI website. For many years, Pakistan has persistently requested the MSCI to upgrade its capital market status from ‘frontier’ to ‘emerging’ to attract more portfolio investment into the country.

Pakistan was part of the MSCI Emerging Markets Index (EM) for 15 years, but it dropped the country in December 2008 after the Karachi Stock Exchange remained shut for many months in the wake of the financial crisis.

Good news in June?

In the MSCI’s annual review scheduled for June, analysts say there is a possibility that the United Arab Emirates and Qatar will be elevated from the MSCI FM Index to the MSCI EM Index. “It should bode well for Pakistan – raising Pakistan’s pro-forma weight to 5.7% – while a downgrade of Morocco to the MSCI FM from the EM will dilute Pakistan’s weight,” Khurram said.

While the upgrade of the UAE and Qatar markets has been hanging in the balance for a number of years, she said, the chances are still not so bright, given a lack of progress on the Qatar front on foreign ownership limits. Noting that the status quo may persist, she added that the possibility of increasing weights of key markets should not be ruled out entirely, given the improved liquidity and strong market performance, particularly of the UAE, which is up 40.8% year-to-date.

Published in The Express Tribune, May 17, 2013.

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