Market watch: Stocks bloodbath as Pakistan upgraded to MSCI Emerging Markets

KSE-100 suffers biggest intra-day fall in history, recovers slightly to close 1,810.76 points down

KARACHI: It was a historic day for the Pakistan Stock Exchange (PSX) and the market responded in kind, albeit in the most unexpected way possible.

After almost a year of waiting and anticipation over Pakistan's reclassification, stocks bled on the first day of inclusion in the MSCI Emerging Markets Index, with the KSE-100 Index suffering an intra-day fall of over 2,230 points for its biggest decrease in history, in terms of points.

With massive foreign selling and little will to buy, the KSE-100 – a benchmark for market performance – finished at 48,780.81 at close of trading, a retreat of 3.58% or 1,810.76 points in a day.

The development was in stark contrast to expectations of the wider market that was foreseeing a huge amount of inflow once Pakistan was reclassified as an emerging market.



“The market wasn't expecting this to happen,” Arif Habib Limited CEO Shahid Habib told The Express Tribune. “Active funds that track frontier markets sold on May 31 and it was the same case today. They sold more than what was imagined. We were expecting a bearish sentiment to kick in after an initial rise, but not this way."

The bearish tide meant several stocks, including those in the MSCI Pakistan Index, hit their lower limit – a maximum decrease of 5% before trading is locked to avoid a further decrease.

But it wasn't just selling on the part of active funds that led KSE-100 to its biggest fall.

“The budget was pretty hard for the stock market. Capital gains tax was changed to a flat 15%, tax rate on dividend was increased and the recommendation to charge tax on the face value of bonus shares was ignored.

“Everyone is taking the budget measures into their stride. Funds that bought before Pakistan's upgrade are now bearish. With the ongoing probe of the joint investigation team the political scenario is uncertain as well."



So what's next for 2016's best-performing Asian market?

With company fundamentals intact and outlook on earnings and growth largely unaffected, Habib said someone will have to take the lead as stock prices become attractive.

“No one is taking the lead just yet. When prices collapse, it is generally a while before buyers step in. We will have to wait and see.”

Habib, however, said that Pakistan handled its transition to the emerging market well. “Qatar and the UAE were not able to handle the high amount of volume. The PSX, in contrast, managed really well.”

Meanwhile, Elixir Securities, in its report, stated equities closed deep in the red on institutional sell off.

“The index opened down as selling by foreign institutional investors from Tuesday reportedly hit the system and dragged KSE-100 near 49,800 within the first 15 minutes of trading,” said analyst Ali Raza.

“The market witnessed a short phase of recovery but aggressive local institutional selling thereafter, reportedly to meet possible redemptions, resulted in majority of index names including MSCI EM constituents tanking and hitting the lower price limits,” said Raza.



“Meanwhile, higher-than-expected inflation announced during mid-day was also a dampener where CPI for the month of May surpassed the 5% mark for the first time since November 2014.

“[We] expect heightened volatility on a one-session Friday with market opening down but possibly seeing recovery near day's end as savvy investors jump in to take advantage of the weakness and cherry pick notable Index names,” he added.

JS Global analyst Arhum Ghous said that pressure in the market was on the back of MSCI EM rebalancing and likely redemptions in mutual funds.

Overall, trading volumes fell to 403 million shares compared with Wednesday's tally of 410 million.



Shares of 394 companies were traded. At the end of the day, 35 stocks closed higher and 352 declined while seven remained unchanged. The value of shares traded during the day was Rs27.5 billion.

K-Electric Limited was the volume leader with 49.8 million shares, losing Rs0.38 to close at Rs6.94. It was followed by Bank of Punjab with 27.6 million shares, losing Rs0.21 to close at Rs1.15 and Power Cement (right shares) with 23.7 million shares, losing Rs0.35 to close at Rs2.05.

Foreign institutional investors were net sellers of Rs1.73 billion during the trading session, according to data maintained by the National Clearing Company of Pakistan Limited.