MSCI Semi-Annual Index Review (SAIR) May’19

Pakistan’s equity market has recorded a decline of 9.84% or 4,015pts (USD based negative return of 11.9%) since the last MSCI quarterly review back in Feb’19.

Negative performance of the local bourse is attributable to lack of direction on the economic front, delay in the finalization of the IMF program, major changes in the federal cabinet and economic team.

During the period under consideration (01st Feb’19 to 30th Apr’19), the equity bourse has attracted net inflows of USD 18mn with prime concentration in Cements and Commercial Banks (net inflows of USD 14mn in each).

Performance and weight of MSCI Pakistan EM Stocks

Negative contribution by the MSCI EM Large, Mid and Small caps arrived at 2,223pts (contributing 55% to cumulative decrease) to the KSE-100 index.

This was led by HBL (315pts), MCB (121pts), OGDC (90pts), HUBC (317pts), LUCK (222pts), PSO (193pts), and SEARL (158pts).

At present, Pakistan has a weight of 0.031% in MSCI EM. Within the MSCI Pak index, OGDC is the largest constituent (37.4%) followed by MCB (32.5%) and HBL (30.1%).

Furthermore, with a representation of 22 constituents, Pakistan’s free float market cap at USD 4,820mn implies a weight of 0.72% in the MSCI EM Small Cap index.

The largest name within this category is ENGRO (10.98%) followed by UBL (10.5%).

Assuming cut-off date of May 3, 2019 for the SAIR, MCB and OGDC meet the criteria of minimum total market capitalization of USD 1,482mn while HBL is lacking by 14%.

Moreover, none of the stocks in MSCI main index fulfill the minimum criteria of USD 741mn for free float market capitalization.

However, an existing constituent is generally allowed to remain in the Standard Index even if its full market capitalization falls below the Market Size-Segment cutoff that defines the lower boundary of its segment, as long as the full market cap falls within a buffer zone below the Market Size-Segment cutoff (33% i.e. 2/3 lower buffer limit).

By applying the buffers (33%), all three stocks fall within the safe zone on total and free float market cap.

Albeit, in worst case scenario, if the Standard Index contains less than three securities in the EM space, the index continuity rules is expected to be applied and the remaining securities are selected for inclusion in the Standard Index with the updated Market Investable Equity Universe ranked by descending float adjusted market capitalization.

That said, analysts do not see any immediate threat of down gradation of Pakistan by MSCI to FM given sufficient buffer, index continuity rule, and lengthy process of down gradation – first consultation of 6 months along with another 1 year of down gradation process. However, immediate consultation for down gradation cannot be ruled out.

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