EUR 4.64 For Business Accounts Only

Pakistan Market: MSCI upgrade in place; focus may shift to index small-caps

• The final constituents of MSCI Pakistan Index, which will be reclassified as Emerging Markets effective Jun 1’17, have been announced. 6 stocks are part of Global Standard Indexes – HBL, UBL, MCB, OGDC, LUCK and ENGRO. In addition, 27 Pakistani stocks will be part of the Small Cap Indexes. Pakistani stocks that have failed to migrate from FM to EM Indexes appear to be PPL, KEL, FATIMA and PTC.

• The aforementioned 6 mainboard stocks have gained 8%-21%MTD, reflecting market expectations regarding their inclusion. By this token, some of the small cap constituents may now find reason to rally in the days leading up to formal EM upgrade. In particular, some underperforming names this month from the Small Cap list are HCAR, INDU, SEARL, FEROZ and SHEL.

• Based on our recent Asia roadshow, Frontier-focused funds could trim exposure given Pakistan’s smaller weight in the EM basket (est. 0.15% vs. 9%+ in FM). This implies demand from passive EM funds may not fully translate into net FPI inflow. Active EM funds we met are interested in Pakistan but in US$1bn+ market cap names, at least initially. Sectors finding traction with foreign investors include Banks, Insurance, Consumer and Pharmaceuticals; conversely, there is limited interest in commodity-linked sectors.