KSE-100 surges 2.78% to all-time high of 38,559.9 points. DESIGN: NABEEL KHAN
KARACHI: Thanks to the overnight announcement by MSCI about the country’s upgrade from the frontier to emerging markets status, the benchmark-100 index of the Pakistan Stock Exchange (PSX) surged 2.78% or 1,042.12 points on Wednesday to finish at its all-time high of 38,559.9.
In the early hours of Wednesday, global index provider MSCI announced that its Pakistan Index will be reclassified to the emerging markets status, coinciding with the May 2017 Semi-Annual Index Review.
MSCI is a leading provider of international investment decision support tools. Its decision to upgrade the country from the frontier markets status is expected to generate inflow of millions of dollars from passive international funds that track MSCI indices.
Many 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. Pakistan was part of the MSCI Emerging Markets Index between 1994 and 2008. However, the temporary closure of the PSX in 2008 led MSCI to remove it from the index and classify it as a “standalone country index”. MSCI made Pakistan a part of the Frontier Markets Index in May 2009 and it has remained as such since then.
Although the actual reclassification of the index will follow next year, global investors tend to start factoring in the reclassification ahead of the actual change, which prompts massive inflows of global funds in the case of a favourable decision.
Analysts have come up with varying estimates for inflows to the PSX expected in the medium term, such as JPMorgan Chase ($220 million), BMA Capital Management ($300-$400 million), EFG Hermes Holding SAE ($475 million), Intermarket Securities ($300 million), AKD Securities ($500 million), Elixir Securities ($250-$500 million), Taurus Securities ($300-$400 million), Topline Securities ($600 million) and KASB Securities ($700-$800 million).
Analysts estimate the size of the inflows based on the expected weight of Pakistani stocks in the MSCI Emerging Markets Index. A passive fund that is benchmarked against an MSCI index invests money into the constituent stocks according to their respective weight in the index. For example, a country would receive roughly $1 billion in portfolio inflows in case its companies enjoy the collective weight of 1% in an index passively tracked by global funds of $100 billion.
The weight of Pakistani companies in the MSCI Emerging Markets Index will be anywhere between 0.14% and 2%, according to different analysts’ reports. This means Pakistan’s weight in the MSCI Emerging Markets Index will be smaller in percentage terms compared with its current weight in the MSCI Frontier Markets Index (9%). However, the reclassification will bring in bigger foreign inflows in absolute terms, as emerging markets attract far more funds than frontier markets.
According to AKD Securities, active and passive funds of around $1.5-$1.6 trillion are benchmarked against the MSCI Emerging Markets Index. Assuming Pakistan’s weight of 0.19% in the index and the share of passive investments to be 15%, its analysts believe that gross inflows should amount to roughly $500 million as a result of the MSCI upgrade.
Referring to a webinar conducted by MSCI officials on Wednesday, Topline Securities analyst Saad Hashemy said as many as nine Pakistani companies are going to be included in the MSCI Emerging Markets Index. Unsurprisingly, each of these companies recorded an increase in their share prices on Wednesday: OGDC (3.7%), Habib Bank (3.8%), MCB Bank (4.7%), United Bank (4.9%), Lucky Cement (4.91%), Fauji Fertilizer (2%), Engro Corporation (4.7%), Hub Power Company (4.9%) and PSO (4.9%).
Market performance
Opening time 0901
Closing time 1506
Elixir Securities, in its report, stated that the market opened sharply higher with large crosses seen near upper price limits in stocks that are top contender for inclusion in MSCI EM list.
“As a result, benchmark KSE-100 index quickly added over 1,000 points to test intra-day high of 38,600,” said analyst Ali Raza.
“Turnover also touched a twelve-month high of $167 million as investors, in an attempt to ride the current Bull Run, built positions in 18 small cap stocks that are a part of MSCI Investable Market Index,” he added.
Meanwhile, JS Global analyst Ahmed Saeed Khan was of the view that positivity prevailed at the PSX throughout the day.
“Apart from the MSCI announcement, autos and fertilisers maintained their positive momentum on the back of measures announced in the recent Punjab budget.
“Moving forward, we expect the market to continue its positive trajectory and any dips should be used as an opportunity to accumulate,” he added.
Trade volumes rose to 243 million shares compared with Tuesday’s tally of 143 million.
Shares of 348 companies were traded. At the end of the day, 204 stocks closed higher, 120 declined while 24 remained unchanged. The value of shares traded during the day was Rs19 billion. K-Electric was the volume leader with 44.6 million shares, gaining Rs0.11 to finish at Rs8.23. It was followed by Pakistan International Bulk Terminal with 14.7 million shares, gaining Rs0.89 to close at Rs33.39 and Engro Fertilizers Limited with 9.3 million shares, gaining Rs0.59 to close at Rs68.07.
Foreign institutional investors were net buyers of Rs285.9 million during the trading session, according to data maintained by the National Clearing Company of Pakistan Limited.
Published in The Express Tribune, June 16th, 2016.
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