Market Watch: Possible MSCI revision pushes bourse close to 36,000

Analysts believe acceptance as emerging market would bring $600m inflow

KARACHI:

Share prices struggled on Friday to continue their surge to an all-time high ahead of the possible reclassification of the Pakistan Stock Exchange (PSX) as an emerging market by MSCI.

After opening on a bullish note, the benchmark index lost momentum to settle on 35,973.69 points at the end of the trading session, up 0.09% from a day ago. The KSE-100 Index ended positive for the fourth successive day, inching closer to the all-time closing high of 36,228.88 points recorded on August 6, 2015.



According to Intermarket Securities, trading was dominated by profit taking and initiation of positions in the second- and third-tier stocks.

Stocks in consumer, industrial and utility sectors fared well while oil exploration and production, refineries, oil marketing companies, cements and banks witnessed profit taking, it added.

Shares of 349 companies were traded during the last trading session of the week. At the end of the day, 155 stocks closed higher, 169 declined while 25 remained unchanged. The value of shares traded during the day was Rs14.3 billion.

Bank of Punjab was the volume leader with 42.8 million shares, shedding Rs0.05 to finish at Rs9.03. It was followed by Pakistan International Bulk Terminal with 26.6 million shares gaining Rs1.14 to close at Rs28.46 and Sui Northern Gas Pipelines with 20 million shares gaining Rs0.13 to close at Rs34.59.

Foreign institutional investors were net buyers of Rs525.9 million during the trading session, according to data maintained by the National Clearing Company of Pakistan Limited.





MSCI

Analysts believe the recent bullish trend in stock prices is a result of Pakistan’s possible reclassification from a frontier market to an emerging market by MSCI. An international firm that provides investment decision support, MSCI is going to announce its decision in June that can possibly lead to massive inflows of foreign funds into the PSX.

Global institutional investors use different MSCI indices -- such as frontier, emerging, China and US markets - to create balanced portfolios to generate maximum returns while keeping in view their overall risk appetite.

Although the actual reclassification of Pakistan will take effect a year after the announcement, global investors tend to start factoring in the reclassification ahead of the actual change.



According to Topline Securities analyst Saad Hashemy, Pakistan’s induction into the emerging markets index is “highly likely” next month. In a research note to his clients on Friday, Hashemy quoted MSCI as saying that the share market has grown significantly with an improvement in liquidity. “MSCI believes that previous concerns of the Pakistan market failing to meet size and liquidity criteria, should the market face negative pressures, have reduced,” he said.

Pakistan has a weight of 8.7% and 8.5% in MSCI frontier markets and MSCI frontier markets-small cap indices, respectively. “In the case of reclassification, the number of constituents of the MSCI Pakistan index is likely to drop from 16 to nine, with the share in the MSCI emerging markets index falling to 0.19%,” he added.

Nonetheless, the reduction in the number of constituents and share in the index is likely to cause a rebound on the PSX because a far greater amount of foreign funds track emerging markets index. “Our back-of-the- envelope calculations suggest a gross inflow of $600 million by emerging markets’ passive funds,” he said.

According to Tundra Fonder, a European mutual fund that heavily invests in Pakistan, revenues as well as profits of the listed companies in Pakistan have grown faster than Indian companies in dollar terms over the last 10 years.

Pakistan is at the lower end of its historical valuation versus other South East Asian peers… an upgrade would force emerging markets investors around the globe to have a closer look,” it said.

Published in The Express Tribune, May 7^th, 2016.

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