Pakistan Stock Exchange: MSCI upgrade revives foreign investor interest

Overseas players turn from net sellers into net buyers in recent weeks

Kazim Alam July 22, 2016
According to AKD Securities, active and passive funds of around $1.5-$1.6 trillion are benchmarked against the MSCI Emerging Markets Index. PHOTO: FILE

KARACHI: Pakistan’s share market is regaining the interest of foreign investors, with overseas players turning from net sellers into net buyers in recent weeks.

The renewed interest of foreign investors in the Pakistan Stock Exchange (PSX) follows the announcement by MSCI about the country’s upgrade from the frontier to emerging market status last month.

MSCI index: Pakistan makes strong case for MSCI upgrade, says FT

The global index provider said on June 15 its Pakistan Index would be reclassified to the emerging market status, coinciding with its May 2017 Semi-Annual Index Review.

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.

Foreign investors responded quickly to the MSCI announcement by accumulating shares worth more than $29.1 million between July 1 and 21. This is in stark contrast with the overall trend prevailing since at least the beginning of 2016.

Foreign investors remained net sellers of shares worth $11.8 million between January 1 and July 22, data from the National Clearing Company of Pakistan (NCCPL) shows.

“We believe that Pakistan’s inclusion in the MSCI Emerging Markets in May 2017 will likely provide support to the local market’s price-to-earnings multiple and valuations going forward. Foreign net inflows have already increased,” Topline Securities research analyst Saad Hashemy said on Friday.

Sponsors of Engro Fertilizers sold 28% shareholding in the company to foreign and institutional clients in June, which caused an unusual, one-time inflow of $70 million last month.

Hashemy said foreign investors’ net selling, excluding the Engro Fertilizers transaction, amounted to $111 million in the first half of 2016.

Pakistan upgraded to emerging markets status


The MSCI announcement renewed the interest of foreign investors in the PSX: its benchmark index rose 4.7% between June 15 and July 21, as substantial inflows from overseas investors are expected to pour in going forward.

Although the actual reclassification of the MSCI index will follow next year, global investors tend to start factoring it in ahead of the actual change, prompting massive inflows of global funds.

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. The weight of Pakistani companies in the MSCI Emerging Markets Index will be 0.2%.

According to AKD Securities, active and passive funds of around $1.5-$1.6 trillion are benchmarked against the MSCI Emerging Markets Index.

With Pakistan’s weight of 0.2% in the index and the share of passive investments around 15%, its analysts believe that gross inflows should amount to roughly $500 million as a result of the MSCI upgrade.

Speaking to The Express Tribune, Insight Securities CEO Zubair Ghulam Hussain said he expects inflows of $300-$400 million in the wake of the MSCI decision.

“Active money managers will position themselves now while the passive ones do that around May/June next year (upon actual reclassification of the index),” he said.

Based on the performance of the stock markets of Qatar and the United Arab Emirates after their upgrade from the frontier to emerging status by MSCI in recent years, Hussain said the benchmark index typically goes up 28%-30% in the one year between the announcement and the actual reclassification.

“Trade volumes also double meanwhile. But the index drops by about 10%-15% after the actual reclassification, with volumes undergoing a normalisation phase as well,” he said.

Published in The Express Tribune, July 23rd, 2016.

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