Following FTSE Russell’s decision to downgrade Pakistan from secondary emerging market to frontier market status, the country might experience passive foreign outflows estimated between $50 million and $150 million, according to KTrade Research. This downgrade, set to take effect on September 23, 2024, is expected to impact various institutional funds.
VANGUARD FUNDS IMPACTED BY DOWNGRADE
Vanguard, the largest passive institutional money manager in Pakistan tracking FTSE benchmarks, holds multiple funds that could be affected by this downgrade. The brokerage anticipates passive outflows could range from $50 million to $75 million as funds adjust their allocations from frontier and unclassified markets.
MARKET REACTION AND OPPORTUNITIES
Despite a 1% decline in the broader market yesterday, KTrade Research views this drop as an over-reaction. The anticipated release of passive flows presents an opportunity for active foreign and rotation-led domestic institutions to increase their allocations with minimal price impacts. The market currently trades at a favorable 4x forward earnings.
FUNDS TO REEVALUATE POSITIONS
Vanguard Funds tracking the FTSE Emerging Markets All Cap China A Inclusion Index are expected to unwind positions in Pakistan, potentially amounting to $53.6 million. Conversely, funds tracking the FTSE Global All Cap ex US Index and the FTSE Global Small Cap ex US Index may adjust their weight and positions due to the off-benchmark holdings.
FTSE GLOBAL EQUITY INDEX SERIES REVIEW
The FTSE Global All Cap Ex US Index includes large, mid, and small-cap stocks globally, while the FTSE Global Small Cap Ex US Index focuses on market capitalization-weighted stocks. Both indices are derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
FUTURE REVIEW OF PAKISTAN IN FTSE INDEX SERIES
According to KTrade Research, Pakistan’s constituents in the FTSE GEIS will be removed following the September 24 review. However, Pakistan will still be included in the Frontier Index Series review on August 23, 2024, reflecting its new status.
