Pakistan stocks drop on eve of MSCI inclusion

On its last day of trading before being upgraded to emerging market status, Pakistan experienced a frenzy of trading — and an unexpected fall in prices.

Pakistan’s stock market dropped on Wednesday, defying expectations of a market rally the day before the country was due to be included in the MSCI Emerging Markets Index. The market closed down 1.67% on the day, but late selling continued in the aftermarket.

The fall came after an almost 40% rise over the last 12 months, and a 5.82% jump since the start of the year. But the poor performance of the country’s benchmark KSE 100 index still surprised some local market participants, since index tracker funds were scheduled to plough into the market at the eleventh hour to shadow Pakistan's inclusion in the index.

There was plenty of trading from foreign investors, but it did little to give a boost to prices. Around $273 million of flows from foreign institutional investors went through Pakistan’s so-called negotiated deal market — that is, off the exchange — out of $508 million of trading throughout the day, according to research from local broker Elixir Securities.

Although the bulk of foreign flows were likely to have been on the buy-side, some foreign investors have been exiting the market. Frontier funds, in particular, appear to have been trimming their positions in the market ahead of the MSCI upgrade, according investors and analysts. JS Global Capital, a local broker, said that foreign investors had sold $222 million of Pakistani stocks by mid-May.

In the long term, the index upgrade seems destined to boost Pakistan’s stock market, although the exchange can no longer boast being a big fish in a small pond.

Who’s in?

Pakistan will represent around 0.15% of the MSCI emerging markets index, compared to its 9.1% weighting in the frontier index. But the EM index is tracked by funds worth between $1.2 trillion and $1.5 trillion, almost 100 times larger than the amount invested in the frontier index, according to research from local brokerage Arif Habib. 

MSCI said on May 16 it would include six stocks in its main emerging markets index, offering few surprises to local analysts. The country’s biggest banks, HBL, United Bank and MCB, led the charge, alongside multinational Engro, local titan Lucky Cement and the state-owned Oil and Gas Development Company.

HBL will make up 23.73% of the MSCI Pakistan Index, UBL will represent 17.8% and Lucky Cement will claim 16.92%, according to Credit Suisse analysts citing MSCI data. MCB makes up the smallest constituent, but overall the three bank stocks represent 54.13% of the index.

Between them, the six stocks had a weighting of more than 29% of Pakistan's KSE 100 index on Wednesday.

These six stocks are not the only ones that will benefit from an influx of fund flows. Another 27 domestic stocks including National Bank of Pakistan, Hub Power and Indus Motor will be included in the MSCI EM Small Cap Index.

Pakistan's stock market shut at 2pm Karachi time on Wednesday, ahead of its standard 3.30pm close due to Ramadan. But local brokers said they were settling after-market trades for hours after the close following the busiest day of trading since the middle of 2008, according to estimates from Elixir.

The KSE 100 index has now fallen from 52,876.46 on May 24 to 50,591.57 by Wednesday’s close, a drop of around 4.4% in the last week.

The government’s budget announcement on May 26 has not helped. Ishaq Dar, Pakistan’s finance minister, replaced a tiered capital gains tax with a fixed rate of 15%, hiked withholding taxes on dividend payments from 12.5% to 15% and said the so-called ‘super tax’ — a charge on corporations and the rich — would continue for another year.

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