PSX: prepping for emerging market

The demons seem to have settled down and its show-time at the Pakistan Stock Exchange. The much awaited emerging market upgrade (effective date June 01, 2017) is almost here and preparations are in full swing from both the brokers and clients side.

Going back thirty days or so, there were fears from all quarters in the market regarding how the MSCI upgrade would play-out amidst the panama-gate and the subsequent Dawn-leaks issue. The volumes had dried up massively and you could barely notice any activity at the bazaar.

However, since the start of May, the situation has completely changed. Panama fears had already subsided but the looming tension with Dawn leaks also got taken care with utmost ease. Volumes have shot up back to levels where market buzz can be felt.

Moving onto the emerging market upgrade, PSX over last few months has seen heavy outflow of funds from foreign investors. This trend might break during May and we can see some heavy inflows coming. Gauging by the activity in potential MSCI EM Index scrips such as HBL, UBL, LUCK, OGDC, MCB and ENGRO, some active foreign funds have started taking position ahead of the re-balancing date.

Foreign funds, especially passive funds that follow the MSCI EM Index need to add stocks from Pakistan to their funds by 31st May, 2017. Usually passive funds, as seen last month during FTSE funds re-balancing, do the adjustment very close to the re-balancing date to avoid any tracking errors.

The catch here for the passive funds is the free float of some stocks which they are looking to add and 5 percent circuit breaker rule at the PSX. To get their desired quantity they will have to make deals with local institutions and outgoing passive frontier market funds to avoid tracking error.

Local high net worth individuals and funds are aware of this situation and are trying to get in before the passive funds so that in case more than expected inflows come, they are able to cash in and make quick gains and that too in blue chip companies.

While many estimates of foreign inflow have been reported ($250 million to $400 million) no one is really sure about what exactly will transpire except that overall activity is going to pick up. New margin products are also rumoured to be introduced soon which would increase overall volumes. An exciting new era awaits the PSX. Let the games begin!