SEVEN out of 10 analysts and equity market pundits polled last week by this writer were `reasonably confident` that Pakistan would make it to the `Emerging Market` status when the Geneva-based Morgan Stanley Capital International announces its `2016 Annual Market Classification Review` in June this year.

Investors at the local market were jubilant when on the first day of this month MSCI the leading provider of research-based indices and analytics announced that as part of consultations with the (various stakeholders), it had sought feedback on the proposal to re-classify the MSCI Pakistan Index to Emerging Markets.

A capital market expert explains that countries categorised in the Emerging Markets (EM) are those which are in the process of establishing stronger markets unlike the Frontier markets (FM) which are thought to be `high risk` markets, usually avoided by large international investment funds.

Pakistan was part of the MSCI Emerging Markets for over 14 years from 1994 to 2008, when in the great global financial market crisis which spilled over into the local equity markets, regulators lost their nerve and imposed the infamous floor` that virtually blocked the investors` exit. Perturbed by the unprecedented move, MSCI shifted Pakistan as `standalone country index`, where it remained till May 2009, when MSCI moved the local index to the Frontier Market.

`The proposal to the MSCI to review the Pakistan market return to the Emerging Market was first submitted to the MSCI two years ago and since then a lot of hard work has gone into it,` said a senior PSX official. `We have travelled the globe and left no stone unturned in convincing the foreign fund managers and the Board of MSCI that Pakistan market was now ripe for its return to the Emerging Market`.

But why such anxiety of finding itsplace back in the pre-2008 status of Emerging Markets? Most analysts were loathe to hazard a guess on the quantum, but some who did, thought that the Pakistan equity market could see an inflow of over $500m as a result of this reclassification. Big global institutional investors use various tools to weigh risks against returns in deciding where to put their money.

According to various sources, the MSCI EM Index is tracked by global funds worth over $2.2tr, dominated by China; South Korea; Taiwan; South Africa; Brazil and others.

Nasim Beg, Vice-Chairman MCB Arif Habib Savings, said that huge global funds do not pick up individual stocks but indulge in `index investing` and although Pakistan weightage might be reduced in EM, allocation would increase by passive funds. For international investing, bigger foreign funds track the MSCI indices.

Khurram Schehzad, Chief Commercial Officer at JS Global Capital says that the size of EM is enormous and most active funds are in the EM segment where the limit of investment for those funds is higher. He believed that the MSCI may have been prompted to review the reclassification due to gradual progression of the Pakistan market toward better overall investment. `Liberalisation, demutualisation, market integration and investor-friendly policies have all done well to improve the image of Pakistan capital market,` he says.

Raza Jafri, head of research and equity sales at Intermarket Securities, concurred that the re-entry in the fold of EM could prove a major trigger for large foreign funds investment as the local stock market would appear on the radar of large foreign funds.`Yes Pakistan will be a small fish in a large pond, yet it would reflect well on the investor sentiments at the local market,` he says.

Analysts noted that as per the proposals, the MSCI Pakistan index would have a potential weight of 0.19pc in EM, signifi-cantly lower than the current 9pc weight in the FM. Out of the 16 companies that are currently part of the MSCI Pakistan index in FM, only nine companies would be eligible to join EM, giving Pakistan a 0.19pc weight, making it the smallest country by weight. Out of those nine companies, OGDC, HBL and MCB would be placed into the large-cap index while UBL, Lucky, FFC, Engro, Hubco and PSO would likely be placed in the mid-cap index.

There are criteria against which the MSCI measures market accessibility in a given country before categorising it in the frontier, emerging or developed market segments. Some of those criteria include foreign exchange liberalisation, capital flow restriction level, clearing and settlement and foreign ownership limit level.

The MSCI`s decision to put up Pakistan market for consultations on re-classifying into EM has been fuelled by several positive developments. Those include launch of the Pakistan Unified Corporate Action Reporting System at the PSX; the introduction of restrictions on the Negotiated Deal Market (NDM) that aims to prevent unauthorised movement of client securities via NDM transactions.

Also the integration of the country`s three bourses into one has gone well with foreign investors. In mid-March, the National Assembly of Pakistan passed the `Futures Market Bill 2016` aimed at regulating the futures market and protecting investors. Market participants stress that the increase in local and foreign institutional participation has helped recovery of market prices of stocks and their liquidity, which enables Pakistan market to meet the MSCI prescribed criteria for EM index with respect to size and liquidity.

In its brief commentary on the decision to put up Pakistan index for consultation, the MSCI had pointed out that most accessibility criteria of the Pakistani equity market met the MSCI EM standards, `except for some poten-tial issues with the stability of the institutional framework`. But MSCI also acknowledged: `The Pakistan equity market has grown significantly and its liquidity has greatly improved. As a result, concerns about the potential for failing to meet size and liquidity criteria should there be a negative market event have receded.

Several market watchers, however, thought that there was nothing to be overjoyed by the MSCI re-classification if that happens. `To hop along with countries with stronger growth rates, fiscals and externals and more liquid markets would be a challenge for Pakistan when it comes to attracting significant foreign flows, especially from active fund managers,` pondered a fund manager.

A senior market analyst pointed out that at the moment, the local bourse was depending almost entirely on just one product-ready cash market. There were no options trading and futures were almost non-active. `The Pakistani market has yet to meet certain criteria like active securities lending and borrowings and allowing short selling in ready market, he said.

The one great reasons that Pakistan market has been bruised and bled and remained deprived of heavy doses of foreign portfolio inflow for all these seven years is the imposition of `floor` by some dumb regulator, though no one has accepted the blame nor has any study including the recently released `Report on stock market crash of 2008` pinned the blame squarely on any individual.

`That sure is history but the shadows are still lurking in the background,` says one major fund manager.

He revealed that a question that most foreign money managers ask is: `How do I believe that such an incident would not be repeated in future? The deep pocket foreigners are convinced in varying degrees when told that a new law forbids any but the chief regulator closing down the market if extremely necessary and that too for a very limited time. •