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LUCK & UBL removed from MSCI Standard Index

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KARACHI: Morgan Stanley Capital International’s (MSCI) Wednesday removed United Bank (UBL) and Lucky Cement (LUCK) from MSCI Global Standard Index Pakistan.

MSCI announced it in an early morning bulletin in-line with the expectations of the market analysts.

After this exclusion, Pakistan’s weight in MSCI Emerging Market (EM) index will likely fall to 0.037 per cent from earlier 0.075 per cent (as per previous Semi-Annual review held in May 2018) and from 0.055 per cent as per Oct 23, 2018 closing, we estimate.

UBL and LUCK have now been demoted to MSCI Global Small Cap Index where MSCI has removed Honda Atlas Cars (HCAR) and Maple Leaf Cement.

With this, Pakistan will be left with a total of 25 constituents (vs. 27 up till now) in MSCI Pak Investible Market Index (IMI) where 3 constituents Oil & Gas Development (OGDC), Habib Bank (HBL) and MCB Bank (MCB) are part of MSCI Global Standard Index Pakistan.

The analyst believed that removal of UBL and LUCK from MSCI Global Standard Index Pakistan was due to their decline in market capitalization, falling below 2/3rd of MSCI’s set criteria for Free Float and Full market capitalization.

To note, MSCI today also revised down its Free Float and Full Market Capitalization criteria by 7 per cent to $741 million and $1482 million, respectively.

MSCI’s price cut-off for this Semi-Annual review was any one of the last 10 business days of October 2018. While Pakistan’s market recovered since Oct 23, 2018 (+9% to date) after Saudi Arabia’s announced financial package of US$6bn, as before, it remained under pressure throughout the year.

From Jan 2018 till 23 Oct 2018, LUCK was down 21% (Free Float and Full market cap. down 35% and 65% to US$393mn and US$983, respectively) while UBL was down 28% (Free Float and Full market cap. down 40% and 60% to US$1,243mn).

KSE-100 index during the same period lost market capitalization of $20 billion (down 2,756pts or 6.8 per cent in Pak rupee terms and 23 per cent in $ terms) on the back of pressure on external account front. Moreover, Dollar against PKR during the aforesaid period appreciated by 21 per cent.

Though removal of LUCK and UBL from MSCI Global Standard Index Pakistan will not result in Pakistan being demoted from Emerging to Frontier market for now, demotion/removal of any one of the existing 3 constituents (OGDC, HBL, MCB) in the next Semi-Annual review (May 2019) may change the situation.

To note, a country is removed from MSCI EM if at least 3 of its companies do not meet the set MSCI benchmarks.

With removal of LUCK and UBL from MSCI Global Standard Index Pakistan, we estimate a potential outflow of $49-65 million. However, their addition to MSCI Global Small Cap Index may result in some inflows.