(Bloomberg) – Index provider MSCI Inc. downgraded Pakistan to frontier four years after it was upgraded to an emerging market.
“Although the Pakistani equity market meets the market accessibility requirements under the emerging market classification framework, it no longer meets the standards for size and liquidity,” said a statement from MSCI. The proposal is to be implemented with the biannual index review in November, said MSCI.
The decision was expected because Pakistan began to fall short of the MSCI’s size and liquidity criteria after being promoted to an emerging market in 2017. The South Asian nation’s CFE 100 index rose to a record ahead of the update, plunging into a bear market shortly afterwards.
A corruption scandal involving then Prime Minister Nawaz Sharif sent foreigners on a sales tour. Overseas investors have sold more than $ 1 billion worth of shares since the upgrade. The KSE-100 is down 12% from its record high.
“After Pakistan’s downgrade, passive investors will have to sell approximately $ 100 million worth of shares after the change goes into effect,” said Brian Freitas, a New Zealand analyst who publishes on the independent research website Smartkarma, by telephone before the decision.
Pakistan has a weighting of 0.02% in the MSCI Emerging Markets Index, according to data compiled by Bloomberg. The MSCI Pakistan Index consists of Lucky Cement Ltd., MCB Bank Ltd. and Habib Bank Ltd. As of November 2019, none of them met the size or liquidity criteria, MSCI said.
There’s a silver lining. Pakistan will have a stronger presence in the MSCI Frontier Markets Index with a weighting of 2.3%, according to an MSCI simulation based on data up to April 19th. The change will result in the funds increasing their Pakistani stake to 10% within a year, said Mattias Martinsson, chief investment officer of Tundra Fonder AB.
Frontier Market “Investors have been craving liquidity and more classic frontier stories,” he said. “You will find both in Pakistan.”
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