Pakistan survives downgrade from emerging status

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In an anticipated outcome, Pakistan has maintained its position in the MSCI Emerging Market (EM) index post MSCI’s May20 semi-annual index review. Note that all 3 of Pakistan’s constituents were unable to meet the required criteria for eligibility. We, however, believe that MSCI likely offered some relaxation in light of the coronavirus pandemic as the potential removal of even one of its security from the index would have made Pakistan fall short of the minimum number of constituents required (3) for the index’s eligibility.

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Consequently, MSCI Pakistan’s capitalization stands at USD 1.3bn with a weight of 2.5bps.

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We believe investors will welcome the development as the recent pandemic driven underperformance sparked fears of a potential downgrade resulting from the deletion of any one of the index’s constituents, mainly Habib Bank Limited (HBL), which fell short of meeting both the Market and Free-float based capitalization requirements.

We believe this development has the potential to revitalize investor sentiments, particularly towards HBL, which has shed 40% of its value since Mar20, underperforming the KSE100 index by 25pps.

Going forward, we believe Pakistan’s status will likely come under the radar in Nov20’s semi-annual index review. Within that timeframe, we believe the country’s equity markets have the capacity to recover lost grounds given recent developments including a substantial cut in discount rates. The table below highlights the pricing levels required for each stock to meet the MSCI EM index’s eligibility criteria.

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Within the small-cap index, Mari Petroleum (MARI) and Pakistan Petroleum (PPL) have been added while Nishat Mills (NML) and Sui Northern Gas Company (SNGP) have been removed.

For the longer horizon, we highlight potential stocks within range of an upgrade to
the main index in the table below.

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