PSX: dazed and confused

On 16th May (2am PST), MSCI announced the much awaited re-classification of its various indexes where stocks from Pakistan were expected to be part of the emerging market index. As per the announcement six stocks (HBL, UBL MCB, LUCK, OGDC, ENGRO) were added to the main index while twenty-seven stocks (FFC, BAFL, DGKC, EFERT, FCCL, FEROZ, FFBL, HCAR, HUBC, IGIIL, INDU, ISL, KAPCO, MLCF, MTL, NBP, NML, NRL, PAEL, PKGS, POL, PSMC, PSO, SEARL, SHEL, SNGP, THALL) were added to the small cap index.

The announced list had couple of surprise additions from the steel, oil and auto-parts sector which grabbed the attention of investors. However, there was some confusion initially where the weightage of Pakistan stocks was understated in a MSCI document due to some error. The market was expecting the total weight to be around 0.18-0.19 percent, while the actual weight was 0.14 percent. In one of the MSCI document this percentage was somehow rounded off to 0.10 percent.

Since the announcement was in the early hours of the morning for Pakistani investors, most institutions clarified the issue during market time. Some brokers took the percentage as de facto and issued reports on how less foreign flow will come in the market. This created some panic at the start of the trading session as those participants who had bought based on the inflows took to selling. The index after opening about 500 points on the positive side dived down 500 points into the negative territory. The momentum was lost.

The column had previously discussed how local institutions and high-net worth were prepping for the MSCI event. The price-action in the market post the event is also suggesting a ‘sell on news’ strategy. Most big ticket stocks had already gone up around 10 percent so those looking for a quick were well within their rights to take some money off the table.

Many retail investors jumped in thinking that foreign flow is going to come from the very next day which is not correct. The effective date for passive funds is June 1st, 2017 which means that they have time till end of May to adjust their portfolio. Due to the very low weightage of stocks from Pakistan, some can even choose to ignore the small cap scrips as it would be covered in the tracking error.

Overall there seems to be no consensus in the market as to what the real impact of the upgrade is going to be. The budget is coming next week and it looks like a much more important event as it would set the direction of the market fundamentally rather than the emerging market upgrade which so far has been an anti-climax.