Stocks at PSX subdued as investors waver over MSCI decision

• The benchmark KSE-100 index fell 38.95 points or 0.08% on Monday, to close at 46,918.52.
• MSCI announcement regarding the reclassification of PSX is due on September 7.
• According to analysts, reclassification of PSX will help increase the number of foreign investors.

KARACHI: The Pakistan Stock Exchange (PSX) experienced a bearish session as investors were concerned about the potential removal of PSX from the MSCI’s Emerging Markets (EM) Index to Frontier Market (FM) Index.

Despite a positive open, the benchmark KSE-100 index failed to sustain the momentum as selling pressure pushed the index down by nearly 40 points. Additionally, lack of any news on progress in talks with the International Monetary Fund regarding the $6 billion loan programme also kept activity subdued.

On the results front, Fauji Cement Company announced its FY21 earnings per share of Rs2.52 as compared to a loss per share of Rs0.04 in the corresponding period last year.

However, the stock succumbed to selling pressure as investors seemed disappointed over no payout after which the stock closed at Rs19.50 (down 2.69%).

The benchmark KSE-100 index fell 38.95 points or 0.08% on Monday, to close at 46,918.52 points.

A report from Topline Securities stated that a lackluster session was observed at the bourse today with KSE-100 index closing slightly in negative.

“Concerns regarding a ballooning trade deficit number coupled with a potential reclassification of Pakistan from the MSCI Emerging Market Index to the MSCI Frontier Market Index kept the investors at wary,” the report said.

Trading volume plummeted to 417.8 million shares compared to 465 million shares traded on Friday (September 3).

During the session, shares of 382 listed companies were traded. At the end of the session, 164 stocks closed in the green, 203 in the red and 15 remained unchanged.

TPL Corp was the volume leader with 59.8 million shares, gaining Rs1.32 to close at Rs24.6. It was followed by Service Fab (R) Limited with 35.7 million shares, losing Rs0.66 to close at Rs4.21 and Telecard Limited with 31 million shares, losing Rs0.09 to close at Rs21.83.

MSCI decision due on September 7

Earlier in June, the Morgan Stanley Capital International (MSCI) had proposed the PSX be downgraded to its Frontier Markets (FM) Index in November 2021 from the Emerging Markets (EM) Index. The final decision in this regard is to be announced tomorrow (September 7), meanwhile the implementation will be done in November.

The reason for potential reclassification was the steady decline in market capitalisation of Pakistan’s constituents (companies listed at the PSX) since 2017, leading to ineligibility of the stock market to meet the criteria for market classification framework for the EM Index.

Elaborating further, Arif Habib Limited Head of Research Tahir Abbas said: “The reason for potential reclassification is the steady decline in market cap of Pakistan constituents since 2017 leading towards ineligibility on meeting the criteria in the market classification framework for EM.”

Pakistan had been upgraded to the MSCI EM Index in May 2017 after a gap of nine years. Previously, the MSCI placed Pakistan in the Frontier Market Index in 2009.

According to analysts, reclassification of PSX will help increase the number of foreign investors as many market participants have continued to advocate that Pakistan was much better off in the MSCI FM index.

Foreign investors invest capital in different countries by looking at the MSCI indices. The investment plan of these passive investors depends on the changes ie on its weight or classification by the financial company.

While a downgrade reclassification may sound as a demotion but market players insist that a higher weight in the FM index will increase foreign investment.

Speaking to Geo.tv, Pakistan-Kuwait Investment Company Head of Research Samiullah Tariq said: “Most probably, the MSCI will downgrade PSX to its Frontier Markets (FM) Index tomorrow.”

The decision will come on the back of performance evaluation. “The firms at PSX were unable to meet the requirements of the benchmark market cap due to which the MSCI proposed this reclassification.”

As an immediate reaction to the potential move, investors at the local bourse may resort to selling of shares and new investors may take fresh positions across the board keeping in view which firms are excluded from the large-caps at EM Index and which firms are placed in FM Index.

Meanwhile, Abbas told Geo.tv that the potential reclassification is expected to be in one go in November 21 semi-annual index review.

The MSCI Pak FM standard cap will include Lucky Cement (35.5% weight), MCB (23.1%), HBL (22.2%) and Oil and Gas Development Company (19.1%).

“The MSCI Pak FM would have weight of 2.3% in MSCI Frontier Market Index and 5.8% in the MSCI Frontier Market 100 Index,” he said.

“Meanwhile, the small cap of simulated MSCI Pak FM will include Pakistan Petroleum, Mari Petroleum, Engro Corporation, UBL, Fauji Fertiliser Company, Pakistan Oilfields, Pakistan State Oil, Hubco, Indus Motor Company, Engro Fertiliser, TRG Pakistan, BAHL, Abbott Laboratories, NBP, Systems Limisted, Millat Tractors, Searle, BAFL, Packages Limited,” he added.

The brokerage house in its commentary added that currently the size of funds tracking the MSCI FM space has compressed to $5.5-6.5 billion, while most of them are active funds.

Although the Frontier Market has shrunk in size since 2017, amid global redemptions in the wake of COVID-19, “we believe our weight will gradually go up as markets rebound and attract pre-corona foreign inflows, and the weight of Bangladesh and Nigeria market is currently frozen,” Abbas said.

“Moreover, barring Vietnam, the fundamentals of the KSE-100 index are relatively stronger than those of the peer markets (with a higher weight) with valuations at very enticing levels. Overall dynamics of the KSE-100 index are comparatively stronger than the peer markets with a higher weight such as Kazakhstan, Kenya, Bangladesh etc.”