Benchmark methodology changed: Free-float based KSE-100 Index from Oct 15

RECORDER REPORT

KARACHI: Based on free-float method, the benchmark KSE-100 Index would be implemented on Karachi Stock Exchange from October 15, 2012.

Karachi Stock Exchange had changed the base of the benchmark KSE-100 Index from market capitalization to free-float and the KSE Board approved it in April this year on the recommendation of Index Experts Committee. 

Managing director Nadeem Naqvi, while briefing media about the changed methodology of benchmark KSE-100 Index on Friday said the KSE-100 index will now be calculated on the basis of free-float market capitalization of companies instead of full market capitalization.

He said the rules for composition and re-composition of the index will remain unchanged. The only difference of the new index is the selection and computation of the index on the basis of free-float market capitalization instead of total market capitalization of the existing index.

He said the KSE board of directors had constituted the Index Expert Committee some six months back to look into the matter of formation of indices.

He said that the committee had recommended changing the methodology of the benchmark KSE-100 index from market capitalization to free-float basis and the KSE board approved the same in April this year.

He said the changed methodology of the benchmark would help to remove investors concerns about the weightage of 100 scrips of the index. He said the weightage of various scrips in the benchmark would change and the new index would reflect the true picture of market performance.

For example, he said the weightage of OGDC would reduce from 21.45 percent in the existing index to 13.08 percent in new index. Similarly, the weightage of Nestle, another heavyweight would reduce to one percent from existing 5 percent. 

He pointed out that the methodology of benchmark indices has been changed in almost all countries and now all the major indices are based on free-float.

He said the changed methodology based would more transparent and would increase investors’ confidence. He was expecting the changed index would attract more foreign investment at the local equity market.

He pointed out that Pakistan market was the best performing market this year. Its average returns were over 30 percent highest than all the investment avenues, he added.

He said the changed methodology of the benchmark is nearer to the international standards. He said the KSE team had a meeting with MSCI, the global indices providers in London recently to discuss the issue to upgrade Pakistan market from Frontier to Emerging Market.

The KSE deputy managing director Haroon Askari also briefed the media about the needs to change the methodology of the benchmark and said the free float based index would be as per international standards.

Sani Mehmood, head of product development KSE in his detailed presentation said that the primary objective of the KSE-100 is to have a benchmark by which the stock price performance can be compared to over a period of time. In particular, the KSE-100 index is designed to provide investors with a sense of how the Pakistan equity market is performing. Thus, the KSE-100 index is similar to other indicators that track various sectors of country’s economic activity.

He said the KSE-100 index was introduced in November 1991 with base of value of 1000 points. The index comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which captures over 90 percent of the total market capitalization of the companies listed on the exchange.