KARACHI (May 15 2009): The Morgan Stanley Capital International (MSCI), a leading provider of benchmark indices, has announced to include Pakistan in MSCI Frontier Index from the close of May 29, 2009. The MSCI withdrew Pakistan from MSCI EM Index on December 15, 2008 because of imposition of price floor at Karachi Stock Exchange on August 27, 2008.

The KSE-100 index performance remained resilient at 23 percent against MSCI EM 27 percent and MSCI FI 3 percent year-to-date, at a time when KSE remained outside MSCI. With the inclusion in MSCI frontier indices, we believe, the investors confidence will improve on the back of improved liquidity, analysts said. Pakistani equity market is trading at a trailing PE of 6.4x vs overall GCC PE of 10.79x.

As decided by MSCI in March, Pakistan has been added to MSCI Frontier Index, Mohammad Sohail, a leading analyst said. This is not a surprise as announcement was already made in March. However, Pakistan downgrade from Emerging Markets to Frontier Markets will attract lesser portfolio investment as global funds tracking Frontier Markets are lesser than those tracking Emerging Markets, he added.

Muzammil Aslam, an analyst at JS Global Capital said that MSCI has announced the results of its May 2009 Semi Annual Index Review for the MSCI Equity Indices. Besides being significant for global capital markets, the event carries importance in the context of the Pakistan market where foreigners still hold 19 percent of the total free float. As it was indicated by the index provider earlier, MSCI Pakistan Index will be included in MSCI Frontier Markets Index effective May 29, 2009.

A total of 12 Pakistani companies have been included with MCB Bank one of the top additions to the index. MSCI Pakistan Index which had been operating as a standalone index since the beginning of the year has now been formally included in MSCI Frontier Market Index effective May 29, 2009.

The Pakistan index first inducted in the MSCI Index series in February 1994 had been removed from Emerging Market (EM) Index in December 2008 mainly due to material restrictions on capital controls on account of price floor thus rendering the MSCI Pakistan Index uninvestable.

Removal of the price floor in mid December and subsequent smooth functioning of the equity markets propelled Pakistan\'s inclusion in the Frontier Index. "We believe Pakistan will occupy a relatively higher representation in the MSCI Frontier Index (2.0-2.5 percent) as against only 0.14 percent in the MSCI EM Index prior to its exclusion," Farhan Rizvi, another analyst at the same research house said.

The stocks included in MSCI are MCB, NBP, UBL, NIB, OGDC, POL, PSO, Kapco, Hubco, FFC, JSCL and PTC (having combined weight of 45 percent in KSE 100 index). He said that after witnessing an outflow of $67 billion during 2008, emerging markets as reflected by MSCI EM equity indices rebounded sharply and surged 27 percent year to date.

Upbeat global investor\'s confidence can also be gauged through $4 billion worth flows that reached emerging markets just in the first week of May against $8 billion flows through March 15 to April 21 - highlighting investors easing concern on global recession. In contrast, Frontier Markets remained under pressure and witnessed a drag of 19 percent during the first quarter of 2009.

However, improved liquidity and commodity prices reversal from trough have sparked the rally in frontier markets which recovered and post 3 percent gain since January. While KSE-100 index performance remains impressive and surged 23 percent, highlighting KSE\'s low correlation with international markets and global liquidity.

Currently, foreigners hold 4.7 percent of total market capitalisation and 19 percent of free float. He said that the stock market performance remained resilient even at times when KSE remained outside of MSCI tracking indices-highlighting local institution confidence on corporate earning outlook and economy.

"We believe, with the re-entry in MSCI frontier markets the net selling pressure from foreign institution will slowdown," Muzammil Aslam and Farhan Rizvi said. Total foreign net selling since December 15 has been recorded at $291 million. Pakistan market currently trades at an attractive one-year forward PE of 6.5x, a deep discount of 40 percent compared to regional markets.