Daily Times

KARACHI: Pakistan equities started the trading week on a strong bullish note amid prevailing MSCI euphoria in the market as the benchmark KSE-100 index scaled 1,085 points to reach an all-time high of 50,935 level mainly led by commercial banking stocks.

On Monday top Index point contributors were all MSCI names again with HBL (+5%), UBL (+5%), MCB (+5%), OGDC (+4.3%) & LUCK (+2.4%) racking up 552 points to the upside, while FFC (-0.7%), ABOT (-1.6%), KEL (-1.1%), KTML (-0.8%) & PICT (-2.8%) eroded only 28 points.

Bulls dominated the equity market as investors’ attention remained focused on the upcoming MSCI emerging-market review due on May 15. MSCI had announced on June 14, 2016 to reclassify Pakistan from Frontier Markets (FM) to Emerging Markets (EM) coinciding with the May 2017 Semi-Annual Index Review. The exact proportion of Pakistan Market in MSCI-EM and the stocks to be included are to be announced on May 15, 2017 and would be effective on Jun 1, 2017 (or from closing of May 31), according to a report by Topline Securities.

“We expect the Pakistan Market to experience positive sentiments pre and post inclusion in MSCI-EM index as foreign funds will get the exact proportion of Pakistani Stocks on May 15 and would likely start rebalancing more aggressively from then”, the report said adding while on the day before inclusion, May 31, 2017, we may witness amplified volumes and volatility, similar to the activity witnessed on Mar 17, 2017 when the FTSE index rebalancing took place. Similar to Dubai & Qatar – which rallied 90% & 46% from MSCI-inclusion announcement (Jun 11, 2013) up till the actual inclusion (Jun 1, 2014), Pakistan’s KSE-100 index has rallied 33% since the announcement to date with only 17 trading sessions left before inclusion”.

Post inclusion, Dubai & Qatar markets shed 25% & 5% by the end of 2014, however, inferring post inclusion performance may not be a good proxy as those markets were upgraded around the time when international oil prices were at peak levels of around $108/bbl, after which Arab Light prices crashed 50% closing the year 2014 at $55/bbl. “We believe PSX would enter a consolidation phase post inclusion, with fundamentals coming back in to the foray. Our index target for 2017 remains intact and we are of the view that KSE-100 would close the year around the 56,000 points level”, Topline Securities report said.

Pakistan is expected to have a 0.15% weight in MSCI-EM.MSCI has set quantitative and qualitative classification framework for inclusion in it’s index. Companies with a market cap of $1,260 million, free float market cap of $630 million and 15% ATVR (Average Traded Value Ratio) will be part of the index.

Furthermore, companies must also meet MSCI subjective criteria in terms of openness to foreign ownership, ease of capital flows, efficiency of operational framework and stability of the institutional framework. FFC no longer meets the capitalization criteria as it has declined 10% since November 2016.

Total funds tracking MSCI-EM are $1.4-1.7 trillion out of which around $350 billion (20-25%) are passive. This results in gross inflow of EM passive funds of around $450 million based on an expected 0.15% weight in the MSCI-EM index. Exclusion from MSCI Frontier Markets (FM) would lead to outflows of around $150 million, which results in net inflow from upgrade of around $300 million. Further, accounting for ongoing selling, our net inflow for 2017 is expected in the range of $100-200 million.

Based on average daily turnover and allocation of $450 million passive flows, it could take approximately 30 days to execute. However, it is likely that those flows would be met much quicker, as funds tracking MSCI-EM index may cross large blocks of shares with FM funds as witnessed during the FTSE rebalancing, according to the report.

Volumes on Monday rose by 6% to 326 million shares, while traded value shot up 17% to Rs 20.8 billion/$198 million.

The market is heating up; with only 5 trading sessions left till the review on May 15, and 17 sessions till inclusion on June 01. Analysts believe the index will continue its upward trajectory driven by scripts likely to be included in the MSCI-EM index.