MSCI Annual Review upgrades Qatar & UAE to EM – Topline , AKD and KASB Research
By: Asad I. Siddiqui,
Topline Securities (Pvt.) Ltd.
MSCI, a leading provider of investment decision support tools worldwide, announced the results of the June 2013 Annual Index Review for MSCI Equity Indices with no direct change for Pakistan.
From Frontier Markets (FM), index of 25 countries, 2 counties (Qatar and UAE) have been reclassified to MSCI Emerging Markets (EM) while Morocco has been downgraded from EM to FM.
With reclassification of UAE and Qatar indices, Pakistan weight-age in the FM is likely to increase despite Morocco index reclassification to FM.
Neither there was any announcement regarding Pakistan potential up-gradation to EM nor was Pakistan added to the Review list.
At present, MSCI Pakistan includes 11 companies with overall weight-age of around 5.1% as of May 31, 2013.
By: Raza Jafri,
UAN: 111-253-111 Ext: 693
AKD Securities Limited
MSCI has confirmed that effective May’14, Qatar (16.8% weight in FM) and UAE (12.4% weight in FM) will be reclassified as Emerging Markets from Frontier Markets presently while Morocco will be classified as a Frontier Market in the Nov’13 semi-annual index review. Considering the combined weight of 29% for Qatar and UAE, the remaining constituents in the Frontier Markets space will likely witness increased weight where we estimate that Pakistan’s weight in the MSCI Frontier Market Index may increase up to 7% from 5% at present, implying positives for the broader market in general and blue-chips in particular. Going forward, while Pakistan has not yet been considered for review for a potential upgrade to Emerging Markets status it already meets the quantitative criteria for elevation. Moreover, considering qualitative criteria does not appear to be particularly stringent, Pakistan’s history of being part of the MSCI Emerging Market Index prior to 2008 (albeit with a small 0.12% weight) and the ongoing uptick in activity at the KSE-100 (CY13TD volumes: 262mn shares; value: US$86mn; net FPI: US$400mn), we believe the case for an upgrade will only become stronger going forward.
Weight gain for Pakistan! MSCI has confirmed that Qatar and UAE will be reclassified as Emerging Markets, effective May’14 while Morocco will be classified as a Frontier Market in the Nov’13 semi-annual index review. Considering the combined weight of 29% for Qatar and UAE, the remaining constituents in the Frontier Markets space will likely witness increased weight despite Morocco’s inclusion, consequently leading to higher basket allocations. In this regard, we estimate that Pakistan’s weight in the MSCI Frontier Market Index may increase up to 7% from 5% at present. Pakistani companies that are presently part of the FM 100 are OGDC, MCB, FFC, POL, ENGRO, UBL, PPL, NBP, HUBC and PSO.
Pakistan-case for an upgrade? Post the imposition of the price floor across Aug’08-Dec’08, Pakistan was removed from the MSCI Emerging Market Index in Dec’08 and maintained as a standalone country index. Pakistan was later made part of the MSCI Frontier Market Index in May’09 and has remained within that classification for more than 4yrs now. While Pakistan was not considered for upgrade in the recently conducted MSCI Annual Market Classification Review, we believe a case may be made for elevation going forward where Pakistan’s companies meets the quantitative criteria for upgrade (four companies needed with market cap of US$1.01bn; free float market cap of US$505mn and 15% AVTR). While Pakistan has not yet been considered for review for a potential upgrade to Emerging Markets status, we believe the case for an upgrade will only become stronger going forward. In this regard, since 2008 the Frontier Market Index has on average traded at a 17% discount to the Emerging Market Index, pointing to positive for valuation rerating.
More needed for upgrade: Pakistan’s upgrade appears to rest on meeting qualitative criteria which pertains to 1) openness for foreign ownership, 2) ease of capital flows, 3) efficiency of operational framework and 4) stability of institutional framework. In this regard, according to the MSCI Global Market Accessibility Review, Pakistan needs to do more on fx market liberalization (e.g. no alternative to SCRA), streamlining investor account setup and 3) providing overdraft facilities on clearing and settlement. More importantly however, Pakistan appears to still be suffering from the decision to place a price floor during Aug’08-Dec’08 even as market volumes and value have recently picked up considerably (CY13TD volumes: 262mn shares; value: US$86mn; net FPI: US$400mn)
By: Shagufta Irshad Khurram,
+92 21 111 222 000
KASB Securities Limited
MSCI Annual Review: Positive news for Pakistan
In its annual re‐classification review, MSCI has upgraded UAE & Qatar to MSCI EM (effective May‐14) and downgraded Morocco to MSCI FM (from Nov‐13).
Since the upgrade of UAE and Qatar coincides with May‐14 semi‐annual review while Morocco will be added earlier in Nov‐13, Pak will first experience dilution in its current weight from 4.48% in Nov, before rising after 6‐mths.
Our crude calculations based on UAE and Qatar current weights, suggest Pak’s weight in MSCI FM to go up to 6.2% with some correction due to Morocco inclusion (Morocco’s expected weight is currently not available).
MSCI Annual Review: UAE & Qatar upgraded to MSCI EM
In its annual review announced yesterday, MSCI has finally upgraded Qatar and UAE to MSCI Emerging market index (MSCI EM) from MSCI Frontier market index (MSCI FM) where the new classification will be effective from May‐2014. This upgrade was a result of significant progress made by these countries to improve operational efficiency of DVP model (Delivery vs. Payment) and their commitment to enhance foreign ownership limit (FOL). Apart from UAE & Qatar re‐classification, MSCI have re‐classified MSCI Morocco to MSCI FM (from MSCI EM) and MSCI Greece to MSCI EM (from MSCI Developed Markets) which will be applicable fromNov‐2013.
Important developments in Markets not currently on review list
In addition of the current year re‐classification announcement, MSCI has highlighted following markets for the next review‐list,
1) China A shares under review for potential inclusion in MSCI EM Index,
2) Re‐classification of Korea and Taiwan from MSCI EM to MSCI Developed markets under review for the 2014 Annual classification review.
3) Downgrade of Egypt from MSCI EM to MSCI FM given lack of liquid investable stocks and weak foreign exchange market. If done, should dilute Pak weight in MSCI FM.
Pakistan’s weight to dilute inNov‐13, before rising in May‐14
Pakistan failed to get a mention in the review despite the improved liquidity and strong foreign inflows (FPI inflows up 2.26x to US$1bn, net US$399mn) YTD 2013. As per MSCI Global market accessibility review report, Pakistan still needs to 1) improve foreign exchange market liberalization levels, 2) improve operational efficiency for market entry/account opening/clearing and 3) ensure stability of institutional frame/ avoid frequent change in market regulations. More importantly, the recent upgrade of UAE and Qatar markets from MSCI FM should bode well for Pakistan, where the current weight of 4.48% can go as high as 6.2% (excluding the impact of Morocco) in May‐2014. However we highlight, since Morocco will be added earlier in Nov‐2013 than the UAE and Qatar upgrade in May‐2014, Pakistan’s weight will first experience some dilution and then increase after 6‐mths.