Topline Securities Limited - Pakistan Strategy: MSCI Semi-Annual Index Review; LUCK UBL removed from MSCI Standard Index

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Pakistan Strategy: MSCI Semi-Annual Index Review; LUCK & UBL removed from MSCI Standard Index

Morgan Stanley Capital International’s (MSCI) earlier today announced its Nov 2018 Semi-Annual review wherein it removed United Bank (UBL) and Lucky Cement (LUCK) from MSCI Global Standard Index Pakistan, in-line with our view which we published in the report, titled ‘PAK MSCI EM Stocks at Risk of Exclusion’, dated Oct 11, 2018. All changes will be implemented from the close of Nov 30, 2018.
After this exclusion, Pakistan’s weight in MSCI Emerging Market (EM) index will likely fall to 0.037% from earlier 0.075% (as per previous Semi-Annual review held in May 2018) and from 0.055% as per Oct 23, 2018 closing, we estimate.
UBL and LUCK have now been demoted to MSCI Global Small Cap Index where MSCI has removed Honda Atlas Cars (HCAR) and Maple Leaf Cement.
With this, Pakistan will be left with a total of 25 constituents (vs. 27 up till now) in MSCI Pak Investible Market Index (IMI) where 3 constituents Oil & Gas Development (OGDC), Habib Bank (HBL) and MCB Bank (MCB) are part of MSCI Global Standard Index Pakistan.
We believe that removal of UBL and LUCK from MSCI Global Standard Index Pakistan was due to their decline in market capitalization, falling below 2/3rd of MSCI’s set criteria for Free Float and Full market capitalization.
To note, MSCI today also revised down its Free Float and Full Market Capitalization criteria by 7% to US$741mn and US$1482mn, respectively.
MSCI’s price cut-off for this Semi-Annual review was any one of the last 10 business days of October 2018. While Pakistan’s market recovered since Oct 23, 2018 (+9% to date) after Saudi Arabia’s announced financial package of US$6bn, as before, it remained under pressure throughout the year.
From Jan 2018 till 23 Oct 2018, LUCK was down 21% (Free Float and Full market cap. down 35% and 65% to US$393mn and US$983, respectively) while UBL was down 28% (Free Float and Full market cap. down 40% and 60% to US$1,243mn).
KSE-100 index during the same period lost market capitalization of ~US$20bn (down 2,756pts or 6.8% in PKR terms and 23% in $ terms) on the back of pressure on external account front. Moreover, Dollar against PKR during the aforesaid period appreciated by 21%.
Though removal of LUCK and UBL from MSCI Global Standard Index Pakistan will not result in Pakistan being demoted from Emerging to Frontier market for now, demotion/removal of any one of the existing 3 constituents (OGDC, HBL, MCB) in the next Semi-Annual review (May 2019) may change the situation.
To note, a country is removed from MSCI EM if at least 3 of its companies do not meet the set MSCI benchmarks.
With removal of LUCK and UBL from MSCI Global Standard Index Pakistan, we estimate a potential outflow of US$49-65mn. However, their addition to MSCI Global Small Cap Index may result in some inflows.

14/11/2018 5 EN

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Topline Securities Limited

Topline Securities is one of the fastest-growing brokerage houses in Pakistan. It has strong Equity Brokerage, Economic/ Equity Research, Commodity Trading and Corporate Finance & Advisory functions.

Topline Securities has been endowed with numerous awards by renowned international financial organizations. The highlights of which consists of the award for ‘Best Local Brokerage House of Pakistan’ by Asiamoney Brokers Poll (the largest Asia-focused equity services provider poll) in 2016 and ‘Best Equity Brokerage House’ by CFA Society Pakistan in 2015.

Previously, Topline Securities held the title for ‘Best Brokerage House’ for 4 consecutive years (2011-2014) by Asiamoney Brokers Poll. Other awards include the ‘Best Salesperson’ award by Asiamoney for 6 consecutive years (2011-2016), the ‘Arabia Fast Growth 500’ award and ‘Pakistan Fast Growth 100’ award in 2012 and 2013 by AllWorld Network.

JCR-VIS, a credit rating agency providing independent rating services in Pakistan has assigned initial rating of “A-2” for short term and “A” for long term to Topline Securities. Topline Securities is registered as Underwriter, Book Runner and Research Entity with Securities & Exchange Commission of Pakistan (SECP).

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Pakistan Strategy: MSCI Semi-Annual Index Review; LUCK & UBL removed from MSCI Standard Index

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