A broker at the Pakistan Stock Exchange: The country was elevated from frontier to emerging-market status by MSCI Inc. at the beginning of June.ASIF HASSAN/AFP / Getty Images
An entry into MSCI Inc.'s indexes is generally seen as a boost for a stock market, as it opens up the country to international investors and enhances its financial credibility.
It's not turned out that way for Pakistan, where the benchmark KSE100 index has plunged 10 per cent since the start of June, when the country was elevated from frontier to emerging market. The index soared to a record high in May in the run-up to the change, but has since dropped 17 per cent. By comparison, stocks in another of Asia's long-term cheaper markets, South Korea, stand at an all-time high.
Uncertainty created by the political crisis surrounding Prime Minister Nawaz Sharif is seen as a major factor for the rally fizzling out. According to fund manager Asia Frontier Capital Ltd., another cause has been the reaction of local investors to the weight given to Pakistan in MSCI's emerging markets index.
Investors bought large-cap stocks expecting to make it into the index before the upgrade in the hope of selling them to emerging market funds, AFC said in its latest report. However, Pakistan received only a 0.1-per-cent weight in the gauge rather than the expected 0.15 per cent, which led to lower than anticipated foreign inflows from June 1. Global funds have since bought a net $850,000 of local shares, data by National Clearing Company of Pakistan Ltd. show.
As a result, investors pared their positions in the large caps. The six companies admitted by MSCI, which account for about 29 per cent of the KSE100 index, saw substantial losses in the weeks after inclusion.
AFC chief executive officer and fund manager Thomas Hugger said Wednesday it was not a blessing for Pakistan to be upgraded. "If you are a foreign investor in emerging markets you don't care really about Pakistan if the weighting is only 0.1 per cent. You would rather focus on India, China and other big markets, or South Korea."
MSCI is due to include domestic Chinese stocks in the emerging markets index from June next year. Pakistan has "negligible weight and it will go further down," Mr. Hugger said in a phone interview.
On Tuesday, the gauge in Karachi slid the most it had in eight years after a probe set up to examine Mr. Sharif's wealth said it found evidence of possible corruption. That's a turnaround from 2016, when the index was Asia's biggest gainer.
"The current political and macro issues are clouding out the more positive longer-term trends in Pakistan backed by the China-Pakistan Economic Corridor projects, an improving security situation and a large under-penetrated consumer market," the AFC report said.
The Supreme Court is due to review findings that Mr. Sharif was unable to account for the disparity between his wealth and known sources of income, and will convene a hearing on July 17. If the court accepts the charges, it may lead to Mr. Sharif's resignation or removal from power.