Liquidity profile has always been a meaningful consideration, amongst other factors, for international funds investing in frontier or emerging markets, which are gauged through free float and overall trading activity.
Last year, MSCI decided to bring back Pakistan in emerging markets citing progress in trading activity and market reforms, but the country equity market conditions have further developed considerably in terms of better liquidity and rising capitalisation, which has improved chances of higher than MSCI simulated 0.19pc weight in Jun 2016, a report of Pakistan Insight said here on Saturday.
To recall, market fundamental and trading activity considerably improved after 2012 with the gradual implementation of various reforms and support from economic indicators, resulting in MSCI reconsidering Pakistan to include in EM index in May 2016.
The average daily trade value increased to $94 million in 12 months prior to the review compared to $58.5 million during 2009-12. In good old days when Pakistan was a part of MSCI EM index, Karachi Stock Exchange (now Pakistan Stock Exchange) daily traded value averaged at US$450.2m (2005 to 2008 floor rule).
Since the MSCI decision in Jun 2016, market liquidity has further enhanced as the equity market has not only re-rated itself, investor enthusiasm and ample liquidity has also taken volumes to $134 million in 2H 2016 which have further enriched to above $200 million MTD in Jan 2017.
The improvement is also reflecting in the individual companies being part of EM which would effectively result in high ATVR (Annual Traded Value Ratio), a key factor for stock inclusion and weight.
Another measure which foreign funds usually take into account is the number of stocks above billion dollar market capitalisation. At the time of the review, only one stock (MCB PA) was above US$1.0b free float market capitalisation. Now, there are 4 stocks over the benchmark while OGDC (being on the borderline) would comfortably cross the mark once the government divestment plan (5pc stake) materialises.
MSCI indicated 0.19pc as potential Pakistan weight vs 0.14pc in 2008, as the Pakistan equity market has outperformed MSCI EM index by 19.2pc (KSE100 30.6pc return) and the liquidity profile has considerably increased since MSCI decision.
Pakistan weight in EM index may actually increase than already communicated MSCI simulated weight of 0.19pc.
There are also some concerns that whether foreign funds would consider investments as country’s weight would be meagre at 0.19pc. However, we would like to highlight that foreign emerging market funds were active in Pakistan before 2008 when country’s weight in EM was 0.14pc in Jun 2008. We believe, passive index follower may stick to the weight but active investors might allocate higher fund size due to improving market conditions, liquidity and stability. Various global forecasts suggest $300-500 million immediate foreign inflow linked to the MSCI reclassification.
