KARACHI: Investors’ fears of stock meltdown materialised as the KSE-100 index sank 333 points, or 0.71 per cent, to close at 46,397 on Wednesday.

According to schedule, MSCI, the global index provider, announced its decision on Tuesday night, reclassifying Pakistan to Frontier Market (FM) from the Emerging Market (EM) from Dec 1. That ended the Pakistani market’s four-year stint in the EM. The great expectations at the time of upgrade to EM and an instant inflow of $500m of foreign funds on May 17, 2017 proved a sour dream and the benchmark index which had crossed the all-time high of 52,000 points on excited investors’ massive anticipatory purchases, went into free fall so far down that it is yet trying to claw back anywhere near that level.

Pakistan has weight of 0.02 in the MSCI Index while the downgrade to FM would improve its weight to 1.9pc in the smaller market. It has set market men arguing if the reclassification would be a blessing in disguise as it would provide Pakistan access to larger foreign funds.

HBL, Lucky Cement and MCB Bank currently constitute MSCI Pakistan EM index. Engro Corp, UBL and OGDC were initially part of the EM index, however, due to non-conformity to EM criteria, but fell on the wayside.

Analysts at Arif Habib Ltd said that the reason for reclassification to FM was the steady decline in market capitalisation of Pakistan constituents (shares in the EM) since 2017 leading towards ineligibility on meeting the criteria in the market classification framework for EM.

Although the index continuity rule had been applied for MSCI Pakistan since November 2018 to artificially maintain the MSCI Pak index in EM, none of the three companies in MSCI EM met the EM classification framework since November 2019.

EFG Hermes, the leading financial services company, maintained: “We forecast the downgrade will mean passive outflows from EM trackers of $152m. The outflow from the three related stocks would amount to $110m from Lucky Cement, HBL and MCB while the remaining $42m would come from 13 small-cap stocks. Pakistan currently accounts for only 2bps of the MSCI EM Index. Foreigners have sold net $61m since MSCI announced the consultation on Pakistan’s downgrade in late June; they have now sold net $157m YTD.”

In trading at the market, dealers said that Lucky Cement and HBL had both underperformed the KSE-100 index since MSCI announced that it would consult with participants on the proposed downgrade on June 20, 2021. Lucky was down 11pc and HBL 8.7pc, both underperforming the index decline of 7pc. MCB has gained 4pc since the announcement. OGDC, HBL, LUCK and MCB Bank would most likely constitute MSCI Pakistan standard index.

Other than that the market on Wednesday also suffered a fall since the investors were spooked over the government’s intention to increase the electricity tariff in Oct 2021 that it had put on hold in April in order to address the circular debt and retain IMF related flows.

Analysts at Pearl Securities said that the rising commodity prices both locally and internationally also pose a serious threat to inflation which continues to be the main source of concern for the market.

On Wednesday trading at the market, cement sector was hammered due to rising international coal prices. Exploration & Production stocks also spiralled downwards on decline in crude oil prices in the international market.

Published in Dawn, September 9th, 2021