Morgan Stanley Capital International (MSCI), a US-based provider of equity, fixed income, and hedge fund stock market indices, announced last month the reclassification of Pakistan from Frontier Markets to Emerging Markets (EM), which represents 10% of the world’s market capitalisation.
This news was particularly significant considering that MSCI delayed the inclusion of mainland-traded Chinese ‘A’ shares in its key EM index due to lingering concerns about market accessibility.
A report titled “Move over, India. Pakistan is the hottest equity market in South Asia” was recently published on Quartz India, part of qz.com, a global digital business news publication. The report said, “the South Asian nation has beaten major Asian economies this year in stock market performance. In 2016, Pakistan’s benchmark equity index, the KSE-100, has been one of Asia’s best performing. In fact, it is the fifth-best performing stock index globally.”
The renowned news publication that is staffed by journalists pulled from prominent names like Bloomberg, New York Times, The Economist and Wall Street Journal, further reported, “The Karachi Stock Exchange (KSE)—also known as the Pakistan Stock Exchange—has stood out in recent years, despite a troubled political and security environment.”
According to Bloomberg News, KSE-100 has already risen by over 15% this year, making it the best performer in Asia. This when compared to other bigger markets in the region like India’s S&P 100 that gained less than 7%, is stellar performance. Globally also, the KSE-100 has outperformed many stock indices and become the fifth best performing index in the world.
No wonder that with such astounding performance of the Pakistani stock market, the economy that ranks 126th out of 144 countries according the World Economic Forum’s 2015-2016 Global Competitiveness Report is being dubbed the next Asian tiger by experts.
“PSX (Pakistan Stock Exchange) is far ahead (compared to peers) in terms of various performance indicators—valuations, dividend yield, corporate profitability—and has traditionally been traded at a discount to regional and emerging markets. This discount was attributable to lower growth trajectory and higher political and security risk,” said Zafar Masud, a member of the Monetary Policy Committee and a member of the board of directors at the State Bank of Pakistan—Pakistan’s central bank.
“There is a view that this discount will narrow, for all the right reasons,” Masud added. He said economic growth had picked up, too, with the improving security and political situation.
Pakistan’s inclusion in the coveted EM list has been the singular most significant development in the South Asian equity universe this year—a game changer that may well serve as an investment magnet for the economy, especially for the high performing stocks included in MSCI’s EM Index. Last year, Qatar and UAE stock markets were added to the EM list and they saw arrival of $400 million each in next six months of induction. FM is market of a couple billion dollars only, while EM is a market of over a trillion dollars, “So even our lower weight can bring more investment,” said Nadeem Naqvi, managing director PSX. “I can see at least $100 million to $300 million investment coming under EM after one year of our movement into the index.”
In another report, Zeeshan Afzal at Insight Securities said, “In dollar terms, we see $300-500 million foreign inflows from the emerging market index tracking funds while improved visibility of Pakistan market would attract other funds/investors.”
This development is particularly a volte-face considering that Pakistan’s markets have had their fair share of challenges in the past. In 2002, the KSE was shut down due to a stock market crash. Six years later, in 2008, it was temporarily closed following the global financial crisis. Faced with such shutdowns, MSCI dropped Pakistan out of the emerging markets index till this year.
The current above-par performance of the market and the resultant recognition by MSCI has its roots in a well-managed turnaround orchestrated by the government, PSX and the regulatory institutions in Pakistan. The results of a 2012 government amnesty programme to allow investors to buy KSE shares until June of 2014 without needing to divulge the source of funds, doubled the average traded volume on the KSE.
As Ruchir Sharma, the head of emerging markets and chief global strategist at Morgan Stanley writes in his book, The Rise and Fall of Nations, “three countries that have traditionally been economic laggards—Bangladesh, Sri Lanka, Pakistan—are now contributing to the quiet rise of South Asia.”
In related developments, inflation in Pakistan has dropped below 3%, the government’s budget deficit has seen a commendable easing from 8% to 5% of the GDP, and current account deficit is now at 1% of the GDP. Further stability in politics will only help.
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