Pakistan’s stock market weightage could fall in MSCI EM index

Analysts divided on how investors will react to rebalancing; MCB may replace HBL as largest-cap stock

KARACHI: Despite the Pakistan Stock Exchange (PSX) finding its way back into the MSCI Emerging Markets (EM) index in June 2017 after a gap of nine years, overseas investors have become net sellers and things may aggravate in the short run.

MSCI, the global index service provider, is set to unveil its biannual review on Monday (November 13) where it is expected to reduce Pakistan bourse’s weightage to around 0.10% in the EM index from 0.14%. The change will come into effect on December 1, 2017.

The bourse, where investors most of the time focus on upcoming developments, may have factored in the impact of the likely revision as foreigners have kept pulling out of the market.

Analysts, however, are divided on the reaction of investors to the expected MSCI rebalancing. They could offload their stock holdings or the review would turn out to be a non-event for the market with no impact on foreign investors.

Some analysts, while talking on condition of anonymity, said foreigners invested or pulled out of stocks keeping in view the market’s weightage in the EM index instead of market sentiments. This indicated that foreign investors may remain net sellers in the short run, they said.



However, a larger section of the analysts disagreed, saying foreigners had already adjusted their holdings over the past couple of weeks.

“They will react in case the result comes against expectation,” an analyst said. “The unexpected result may be addition or deletion of PSX companies in the MSCI index.”

Six mid- and large-cap stocks are part of the MSCI EM index which include MCB Bank, Habib Bank Limited (HBL), Engro Corporation, Lucky Cement, Oil and Gas Development Company and United Bank Limited.

Their weightage in the global index has gone down after they faced widespread selling at the bourse in the wake of higher taxes on share transactions and prolonged political uncertainty.

Both PSX’s benchmark KSE 100-share Index and the six companies have lost 16% of their value since they became part of the EM index.

Market talk

Elixir Securities pointed to market murmur that MSCI would remove Lucky Cement from the index as its market capitalisation had dropped below the set criteria. However, the research house categorically ruled out the possibility of it happening for the time being.

The second possibility, which was also based on market talk, suggested that MSCI may add Pakistan Petroleum Limited (PPL) in the EM index following improvement in its fundamentals. The research house did not endorse this possibility too.

However, all brokerage houses anticipated that MCB Bank would replace HBL as the largest-cap stock among PSX companies in the EM index as HBL’s weightage had gone down following imposition of $225 million in penalty on its New York branch.

Despite heavy selling by foreign investors, the KSE-100 index recovered 0.9% on a week-on-week basis to 41,436 points on Friday.

The recovery came after mutual funds made value-buying, prompted by the apex regulator’s decision to ease cash-holding rules for the funds. Mutual funds were the largest domestic buyers in the bourse with injection of over $17 million during the week ended November 10, 2017 whereas foreigners were net sellers of $1.8 million.

In the previous week, they had sold shares worth $30.7 million, according to Topline Securities.

Selling was concentrated in banks ($5 million) and fertiliser companies ($3 million) whereas buying was recorded in oil and gas marketing ($3.3 million) and exploration and production companies ($1.7 million).



“The market has recorded net foreign outflows of $98 million from June to date while from January the outflows have been $439 million,” Topline said.

Earlier, the market witnessed net foreign outflows of $315 million and $339 million in 2015 and 2016 respectively. “We expect this trend to continue for the third consecutive year as well,” it said.

Published in The Express Tribune, November 12^th, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.