The Morgan Stanley Capital International (MSCI) has announced to downgrade Pakistan Stock Exchange (PSX), after four years, among lesser advanced economies into Frontier Markets (FM) index with effect from December 1, 2021. “This conclusion follows feedback received from market participants from its recent consultation on a market reclassification proposal for the MSCI Pakistan Index,” MSCI said in a statement in early hours on Wednesday. “MSCI will reclassify the MSCI Pakistan Indexes from Emerging Markets to Frontier Markets in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR).” It is scheduled to hold the SAIR on November 11, 2021 while the review decision would come into effect from December 1, 2021, according to another announcement of MSCI made on August 11, 2021. “Based on a simulation using pro forma data as of August 31, 2021, this would lead to the inclusion of four securities in the MSCI Frontier Markets Index with an estimated index weight of 1.9pc,” it said. Although the Pakistani equity market meets the requirements for Market Accessibility under the classification framework for Emerging Markets, it no longer meets the standards for size and liquidity. More specifically, index continuity rules have been applied since the November 2018 Semi-Annual Index Review to maintain the required three constituents in the MSCI Pakistan Index, it said. “Since the November 2019 SAIR, there have been no securities in the MSCI Pakistan equity universe that meet the Emerging Markets size and liquidity criteria within the MSCI market classification framework.” Starting with the November 2021 SAIR, the MSCI Pakistan Indexes will be rebalanced using size and liquidity requirements for smaller, average liquidity frontier markets as described in section 5.2 of the MSCI Global Investable Market Indexes Methodology, it said. The PSX had been classified in MSCI’s leading Emerging Markets (EM) index since May 2017 when the benchmark KSE-100 Index hit an all-time high of 53,000 points, but the country failed to sustain the level and the index never returned to that high level since then. Apparently, the market has largely factored-in the announced decision as investors continued to sell stocks for a few days at PSX. Accordingly, the MSCI’s decision to downgrade Pakistan into Frontier Markets (FM) from Emerging Markets (EM) stands ‘negative-to-neutral’ for investors. They (foreign and local investors) may still, however, dump stocks in an immediate gesture to formally acknowledge the decision and cherry pick stocks later at lower prices. Experts believe the MSCI’s latest decision on Pakistan is a blessing in disguise, as it has brought PSX back into the limelight with its weight of 1.9pc in Frontier Markets compared to a weight of mere two basis points in emerging markets at present. “The comparatively higher weight in FM would highlight PSX in the eyes of global investors compared to its negligible size in EM,” Arif Habib Limited Head of Research Tahir Abbas said. Oil and Gas Development Company (OGDC), Lucky Cement, MCB Bank, Habib Bank Limited (HBL) are the four companies from PSX that qualified for FM. They would carry a cumulative weight of 1.9pc in MSCI Frontier Market index as per their closing share price on August 31, 2021, Aba Ali Habib Securities Research Analyst Zubair Jatoi said in a short commentary.