Proposed Change in MSCI index methodology & Pak implications

Proposed Change in MSCI index methodology & Pak implications

There is some excitement (and also a little confusion) on newsflow surrounding a newsflow that MSCI has proposed a change in its index methodology which can double Pakistan’s weight in the Frontier index from current 4.3% to 8.4% (if the changes in methodology are applied). This proposal is currently it is in consultation phase and open to feedback till March 24, 2014. The consideration is linked to the migration of UAE and Qatar from MSCI FM to EM in May 2014, after which MSCI flags a concentration risk.

On the face of it, this is an exciting development from the point of view of further foreign flows tracking the KSE. That said, it is important to note that as per MSCI’s website, there is no proposed change to the widely tracked MSCI Frontier Market (MSCI FM). Rather, it is the index methodology of the MSCI Frontier Market 100 (MSCI FM 100) that is being re-considered. The MSCI Frontier Markets 100 Index is a representative and more easily replicable alternative to its broader parent index, the MSCI Frontier Markets Index. The MSCI Frontier Markets 100 Index includes 100 of the largest and most liquid constituents of the parent index.

What is being proposed is that rather than use MSCI FM as the base index for computing MSCI FM 100, once UAE & Qatar emigrate, the MSCI Frontier Markets IMI should be used as the base/parent Index. If this happens, the constituents of the MSCI FM Small Cap Index would be added to the pool of potential FM 100 Index constituents which would treble the size of the pool. At the same time MSCI is proposing to (1) introduce a cap on the size of the largest countries and increase the weight of remaining countries in tandem; (2) introduce more stringent investability requirements and (3) allow the number of constituents in MSCI FM 100 to fluctuate.

Overall MSCI has flagged that if the proposed methodology changes come into play, as per their estimates; Pakistan’s weight in MSCI FM 100 would rise from 4.3% to 8.4% while one more stock from Pakistan (i.e. Lucky Cement Ltd – LUCK  – currently part of FM IMI Small Caps) would be added to the MSCI FM 100. This will be in addition to the 9 current Pak constituents in MSCI FM 100 Index (i.e. OGDC, MCB, FFC, UBL, POL, ENGRO, NBP, PPL and HUBC)

 MSCI’s presentation with the proposed changes in methodology is attached.