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Pakistan stock exchange union into MSCI-EM club: A milestone to get buoyancy of foreign institutions

Published on 4th July, Edition 27-28, 2016

 

Stock market rises all-time high soon after MSCI announcement

Financial sector of any country plays very vital role in the country’s economic growth. Stock market is financial sector’s key institution which provides a platform, where borrower and lender can easily fulfill their financial needs. Stock market performance is factual reflection of any country’s economic performance. In Pakistan stock markets performance is a key for economic uplift and the recent development is a true reflection of the international institutions confidence back in our capital market.

Pakistan stock market is one of the oldest stock exchanges in emerging markets of South Asia it was established soon, a month later, after Pakistan came into being. Karachi Stock Exchange (KSE) is Pakistan’s largest stock exchange and later Lahore Stock Exchange (LSE) and the Islamabad Stock Exchange (ISE), were established but now all these three merged into one name Pakistan Stock Exchange.

The Pakistan market making more progress recently awarded back the status of Emerging Market as Morgan Stanley Capital International (MSCI), the US equity indices provider, has included Pakistan Stock Exchange in its benchmark emerging-market index that is likely to attract multimillion dollars of portfolio investment in the Asia’s best performing market.

“The MSCI Pakistan Index will be reclassified to emerging markets status, coinciding with the May 2017 semi-annual index review,” MSCI said in its annual review meeting. “PSX would be inducted in the EM Index in June 2017.”

This shows the inclusion of Pakistan in the category of Emerging Market is an indication of the confidence of the international institutions in Pakistan´s economy.

The MSCI document said Pakistan stocks will be having a potential weight of 0.19 percent only in the emerging market, second to the lowest 0.18 percent weight of Czech Republic. China has the largest weight of 25.41 percent in EM Index while India is the fourth largest heavyweight in the EM with 9.03 percent.

Pakistan’s benchmark index has already gained 15 percent in 2016 ahead of MSCI decision, as the inclusion in emerging market was the likely proposition. In dollar terms, we see $300-500 million foreign inflows from the emerging market index tracking funds while improved visibility of Pakistan market would attract other funds/investors.

Pakistan had received emerging market status in early 90s that continued till 2008, when stock market saw the crisis and was shut down for some period, which resulted in heavy losses to the foreign investors and they sold their shares in the off market with huge discounts. This resulted in Pakistan’s expel from the EM Index in December 2008. Later, it was included in the list of Frontier Markets in May 2009.

Now major fundamental shift in Pakistan macros (CPEC program and improving energy supplies) will likely stretch the discounted valuations of Pakistani market in convergence with its EM club members.

Last year, UAE and Qatar stock markets were upgraded to EM Index and they saw arrival of $400 million each in next six months of induction. FM is market of a couple billion dollars only, while EM is a market of over a trillion dollars. In the case of Pakistan investors see at least $100 million to $300 million investment coming under EM after one year of our movement into the index.

The MSCI World Index, which is part of The Modern Index Strategy, is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85 percent of the free float-adjusted market capitalization in each country and MSCI World benchmark does not offer exposure to emerging markets.

The MSCI World is a stock market index of 1,643 ‘world’ stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds.

The index includes a collection of stocks of all the developed markets in the world, as defined by MSCI. The index includes securities from 23 countries but excludes stocks from emerging and frontier economies making it less worldwide than the name suggests.

A related index, the MSCI All Country World Index (ACWI), incorporated both developed and emerging countries. MSCI also produces a Frontier Markets index, including another 31 markets.

MSCI maintains three indices for stock markets from developing countries. They are emerging market, frontier market and stand-alone.

In 1994, during the second tenure of the PPP government, Pakistan was included in the MSCI Index for emerging markets. Pakistan maintained its emerging market status for 14 years, during which the stock market witnessed various crises.

Freezing of foreign exchange accounts in 1998 and liquidity crunch in 2005 were among the more chronic crises in the duration.

 

Impact after MSCI decision

Stock market reached all-time high after MSCI announcement. The stock market, during the week, increased by about 5 percent and touched all time high to close at 38,776 levels on the back of MSCI announcement, upgraded Pakistan from Frontier Market (FM) to Emerging Market (EM) status.

Average daily volume increased 21 percent to 183.4 million shares, coupled with 57 percent rise in average daily value.

Banking sector was the best performer in the outgoing week as it rose 12.3 percent, followed by Cement sector which increased 6.2 percent. Engineering was among the underperformers as it fell 1.3 percent during the week. Foreigners were net buyers of S$19.6 million worth of shares this week. Net buying of $17. 4 million was seen in banking sector whereas net selling of $6.6 million was seen Oil & Gas Exploration sector.

During the week, Foreign Direct Investment (FDI) increased 10.5 percent year on year to $1 billion in 11 month fiscal year 2016, according to data from State Bank of Pakistan (SBP). According to experts, overall investments came down to $683 million from S$2. 7 billion in the same period last year. The fall was mainly driven by an outflow of $381 million in foreign portfolio investment.

According to data released by Pakistan Telecommunication Authority (PTA), annual cellular subscribers increased 0.6 percent month on month to 133.5 million in May 2016.

Growth has been tapering off as subscriber levels are reaching those that were seen before Biometric Verification drive held last year.

On MSCI Upgrade PAK ETF surged. According to a PSX notice, Pakistan Oilfields (POL) has informed of a hydrocarbon discovery in Makori Deep, which is part of Tal Block. As per notice, the well tested 2,020 barrels/day and 5.4mmscf of gas. POL has 25 percent working interest in the same.

Al-Shaheer Corporation (ASC) and Shell Pakistan (SHEL) have signed a Memorandum of Understanding (MoU) for collaboration in their retail business in Pakistan.

The two parties are assessing the opportunities for having Meat One branded shops, chillers and products across 700 plus SHEL retail sites across the country.

According to Finance Minister, Pakistan is likely to receive $475 million foreign portfolio investment in the coming year due to the country’s reclassification into Emerging Markets by MSCI. He also stated that the country will not be needing support from International Monetary Fund (IMF) after conclusion of current program.

FXTM research analyst Lukman Otunuga commented that global markets are on high alert as investor anxiety mounts ahead of the heavily anticipated EU referendum vote on the 23rd of June.

Uncertainty continues to heighten and this has triggered a wave of risk aversion, consequently encouraging investors to scatter from riskier assets. He said that most major stocks are vulnerable and could sink deeper into the abyss as investors make a flight to safety amid the ongoing concerns over faltering global growth.

Lukman Otunuga observed that European equities displayed a swift retreat during trading on Thursday following the decline in financial stocks and could trade lower if investor jitters offer a foundation for bears to attack again.

Experts views

Experts said that admitting growing capital markets, improving liquidity and potential macroeconomic growth ahead, MSCI has reclassified MSCI Pakistan Index to Emerging Markets status, effective from May 2017 Semi-Annual Index Review.

To recall, after the imposition of floor at KSE (now PSX), Pakistan was removed from the MSCI Emerging Markets Index in December 2008 and was included in frontier markets in May 2009.

After the Pakistan equity market has functioned without trading disruptions and market size has significantly improved, MSCI placed Pakistan for a potential reclassification to Emerging Markets in Jun 2015.

Pakistan is in MSCI Frontier Markets index with 8.97 percent weight. Though the Pakistan’s weight would be significantly lower in EM (0.19 percent as indicated by MSCI in April 2016) compared to 8.97 percent in FM, larger investor pool along with the improving macros would lure foreign inflows.

Further, MSCI decision to delay the inclusion of China A shares in the EM club would also bode well as the inclusion would have reduced Pakistan’s weight.

Pakistan benchmark index has already climbed 15 percent in 2016 ahead of MSCI decision, as the inclusion in EM was the likely proposition.

However, experts see rerating to continue at Pakistan Stock Market, as witnessed when Qatar and UAE markets were reclassified to EM group, although the decision would be applicable from mid-2017.

The upgrade of the Pakistan Stock Exchange to the emerging market index of Morgan Stanley Capital International (MSCI) will bear fruitful results for the economy in the long-term, said the bourse chairman Muneer Kamal. He said the reclassification will not eradicate poverty in the short term.

“The country won’t become a heaven after this but the foreign investors will get to know that something is improving in Pakistan. The performances of the listed companies have improved during the last four to five years.”

Nadeem Naqvi, managing director at PSX said emerging market index is a passive investment platform of $1.5 trillion and Pakistan’s meager weigh of around 0.2 percent may attract up to $3 billion in a year after its induction in the index after May 2017.

Pakistan’s listed companies have chances to grow by around 10 percent under the EM Index. Profits of companies listed on the KSE 30-share Index increased Rs1.0 trillion in the last few years. He said retail investors constituted around 80 percent of the investment in the market two decades back. Now, they hold 40 percent while 30 percent each is shared by the foreign investors and local institutions.

The bourse would be establishing capital hubs in the big cities with the support of Securities and Exchange Commission of Pakistan (SECP) and first such hub has already been established in Peshawar.

In order to make the market further transparent, brokers would be divided into three categories, he said. The biggest brokerage houses will have full rights of running brokerage, clearing and conducting research.

Category brokers will be conducting research and clearing activities, while small brokers will only have a right of brokerage and they will not be able to have clearing facilities.

Naqvi said investor awareness is the top priority. He said the PSX’s awareness has reached to 30,000 individuals in various cities and towns of the country in last few years. “We are planning to reach many more in the next couple of years,” he said.

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