MSCI Adds Eight Pakistani Companies to Small Cap Index

In a significant development for the Pakistani stock market, Morgan Stanley Capital International (MSCI) Inc. has announced the addition of eight Pakistani companies to its Frontier Market (FM) Small Cap Index. This decision comes as part of the November 2024 index review, which reflects the ongoing changes and dynamics within the financial landscape of Pakistan. However, it is important to note that one company, TRG Pakistan, has been removed from the Frontier Markets Index, marking a notable shift in the index's composition.

The eight companies that have been added to the MSCI FM Small Cap Index include Citi Pharma, Crescent Steel & Allied Products, Fast Cables, Flying Cement Company, Pakistan Oxygen, Shifa International Hospitals, Thatta Cement Company, and TRG Pakistan. This inclusion is expected to enhance the visibility and investment potential of these firms on a global scale. On the other hand, Fauji Fertilizer Bin Qasim has been deleted from the MSCI FM Small Cap indexes, indicating a re-evaluation of its market position.

These changes will take effect from the market close on November 25, 2024. The implications of this adjustment are significant, as it reflects the evolving nature of the Pakistani market and its attractiveness to international investors. Recently, Topline Securities reported that Pakistan's weight in the MSCI index is likely to increase by 50-70 basis points, raising its share from the previous 4.4-4.6% to an estimated 5.0-5.2%. This increase is anticipated to result in a market capitalization growth of approximately 12% for existing constituents.

Furthermore, Topline Securities estimates that the expected increase in weight could lead to gross inflows of $25-30 million, assuming an Assets Under Management (AUM) size of $5 billion tracking the MSCI FM index. However, it is essential to recognize that the actual inflows may vary, as many frontier funds operate actively, which can influence the materialization of these investments.

It is worth mentioning that Pakistan's journey in the global investment landscape has been tumultuous. In September 2021, the country was downgraded from its status as an emerging market, just over four years after being reclassified from the Frontier Markets Index by MSCI. This downgrade was attributed to the Pakistani equity market's failure to meet the necessary standards for size and liquidity, despite fulfilling the requirements for market accessibility.

The recent changes in the MSCI index highlight both the challenges and opportunities present in the Pakistani market. As more companies gain recognition on an international platform, it is crucial for investors to stay informed and consider the potential impacts of these developments on their investment strategies. The evolving landscape of the Pakistani stock market serves as a reminder of the importance of adaptability and awareness in the world of finance.