Pakistan’s stock market in Karachi rallied 2.3% today after MSCI included the south Asian nation to its benchmark MSCI Emerging Markets Index.

It is curious that Vietnam, the new Asian Tiger for its manufacturing prowess and political certainty, remains solidly in the MSCI Frontier Markets category, whereas war-torn Pakistan is now considered an emerging market. Pakistan’s GDP per capita is only $1,275 and Vietnamese are 50% richer.

Entering the MSCI Emerging Markets Index is a big deal. Even though Pakistan is exchanging a sizable 8.9% weight in the MSCI Frontier Markets Index for less than 1% of MSCI Emerging Markets Index, making it the smallest in the EM club, Credit Suisse estimates that foreign institutional investors would buy about $400 million worth of Pakistani stocks after the index change. This is because the emerging markets index is just that much bigger. An estimated $1.5 trillion assets under management track MSCI EM, versus only $15 billion for frontier markets.

When MSCI evaluates whether a country is emerging or frontier, size is just one aspect of classification, noted Natixis‘s Trinh Nguyen. MSCI pays a lot of attention to liquidity – and China learned its lesson today. MSCI rejected China A-shares for the third time, complaining that foreign investors can only repatriate at most 20% of their funds from China every month, and about the daily quota limits on the Hong Kong Shanghai Stock Connect.

Similarly, Vietnam has a lot of foreign ownership restrictions and liquidity issues. The state is still a prominent owner of many publicly-listed companies and “privatization or ‘equitization’ progress has been rather slow,” complained Natixis. Even the well-loved Vinamilk is 45% owned by the government, while foreigners take up the rest.

There are a few other examples on liquidity. Saudi Arabia boasts one of the largest stock markets in the world, but since the oil Kingdom’s stocks are still largely off the limits to foreign investors, Saudi is not in either developed or emerging market (even though its GDP per capita is high). Pakistan itself was demoted to frontier status in 2008 when the Karachi Stock Exchange essentially shut down for 3 months during the depth of the Great Financial Crisis.

Since then, Pakistan has made a lot of progress. It now already has 16 firms that are liquid enough to be in the MSCI universe and will soon have 27.

Also, let’s not forget. MSCI is not the only authority that defines emerging markets. The Global X MSCI Pakistan ETF (PAK) has only $7 million market cap, despite 12% gain this year. The VanEck Vectors Vietnam ETF (VNM) has $344 million market cap, even though it is down 1.2% year-to-date. U.S. investors can’t help feeling nervous investing in Pakistan.

Year-to-date, the iShares MSCI Emerging Markets ETF (EEM) gained 2.4%, while the iShares MSCI Frontier 100 ETF (FM) was little changed.

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