Karachi Shares Index Outpacing Developed, Emerging and Frontier Market Indices

[Riaz Haq]

Pakistan lost its place in MSCI  Emerging Markets Index in December 2008. It was included in MSCI Frontiers Market Index in May 2009.  Some analysts believe that Pakistan could re-gain the Emerging Market classification (which includes BRIC countries) in a couple of years.

Since the beginning of 2012 MSCI’s index of Pakistani shares has jumped 60% in dollar terms—outpacing global indices as well as MSCI Emerging Market Index and Pakistan’s peers among frontier markets.  Pakistan's KSE-100 index was among the top 5 performers in the world in 2013. In recent months foreigners, who kept piling in even as jittery local investors began selling, have bought a net $36m-worth of shares in August, when the PTI and PAT protests were at their height, and a further $53m-worth in September, according to The Economist.

Over the next 6 months $2-2.5 billion of new float is expected to come on stream from Pakistan through government's privatization of assets which should take its MSCI frontier market weightage higher to 9-9.5% with its subsequent effects on passive flows, according to a report in Baron's.

Market classifications of securities from various countries into developed, emerging and frontier indices are made by Morgan Stanley based on a minimum market capitalization and size of free float.

Here's how Morgan Stanley explains it:

In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization. This minimum full market capitalization is referred to as the Equity Universe Minimum Size Requirement. The Equity Universe Minimum Size Requirement applies to companies in all markets, Developed and Emerging, and is derived as follows:

1. First, the companies in the DM Equity Universe are sorted in descending order of full market capitalization and the cumulative coverage of the free float‐adjusted market capitalization of the DM Equity Universe is calculated at each company. Each company’s free float‐adjusted market capitalization is represented by the aggregation of the free float‐adjusted market capitalization of the securities of that company in the Equity Universe.

2. Second, when the cumulative free float‐adjusted market capitalization coverage of 99% of the sorted Equity Universe is achieved, the full market capitalization of the company at that point defines the Equity Universe Minimum Size Requirement.

3. The rank of this company by descending order of full market capitalization within the DM Equity Universe is noted, and will be used in determining the Equity Universe Minimum Size Requirement at the next rebalance.

As of April 19, 2011, the Equity Universe Minimum Size Requirement is USD 140 million. Companies with full market capitalizations below this level are not included in any Market Investable Equity Universe. The Equity Universe Minimum Size Requirement is reviewed and, if necessary revised, at Semi‐Annual Index Reviews.

In a recent interview with Forbes, Mohammad Sohail of Topline Securities in Pakistan has expressed confidence in the country’s capital markets moving forward:

"Things that were held up due to the protests – IPOs, privatizations, reforms, the $800 million share sell of our largest oil and gas company OGDC – have now resumed. When the OGDC deal is executed, I think that will give a very clear signal to the international business community that the protests may still be going on, but investment and business already are operating as usual. Pakistan is an unexplored market by most outside investors that is not marketed properly. Compared to peers, the market is very cheap. Pakistan’s markets trades at a price/earning multiple of 7.5 times; a 30% to 40% discount to Sri Lanka, Bangladesh, Nigeria and Vietnam. For me, from an investor’s point of view, the next 24 months look very positive for the equity markets."

Increase in Pakistani shares weight in Frontiers Index and expected re-entry in Emerging Markets  Index are both welcome developments for Pakistan's economy.  As a result of these developments, Pakistan should expect new capital inflows which would strengthen Pakistan's balance of payments position and spur the nation's overall economic growth.

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[Riaz Haq]

Pakistan on Saturday postponed indefinitely the planned sale of up to 10% of its majority stake in the country’s largest oil and gas business, officials said, in a blow to the government’s ambitious privatization plans.

Pakistani officials cited falling global oil prices for their pulling the offering on the London and Karachi stock exchanges of shares in Oil and Gas Development Co. Ltd. But there was also a poor response to the offer, analysts said, saying there also appears to be in general a wariness abroad toward investing in Pakistan.

The sale of 10% of the government’s stock in the company had been expected to raise at least $800 million, and it was expected to be the biggest divestment by Prime Minister Nawaz Sharif ’s government since it came into power in June last year. Employees own 10% of the company’s shares and the remainder is listed and traded on exchanges.

The government had planned large-scale sales of shares in as many as 31 state-owned enterprises to boost the country’s foreign exchange reserves and bolster public finances

At the close of trading on Friday, however, bids had come in for just 52% of the Oil and Gas Development’s shares on sale, Privatization Minister Mohammad Zubair told The Wall Street Journal.

‘We are in a very, very difficult environment, primarily [because of] the reduction in oil prices, which have been tumbling…This was hardly the time for this transaction.’
—Privatization Minister Mohammad Zubair
Some investors in London, who asked not to be identified, said they remained concerned about political and economic risk in Pakistan and would be interested only if there were steep discounts in price available.

“We are in a very, very difficult environment, primarily [because of] the reduction in oil prices, which have been tumbling,” said Mr. Zubair told The Wall Street Journal. “This was hardly the time for this transaction.”

Global oil prices have declined for months, with that of the world’s benchmark crude oil, North Sea Brent, down 28% since June.

Mr. Zubair also mentioned recent political unrest as contributing to negative investor sentiment toward Pakistan. The Pakistani energy company’s stock offering was twice earlier delayed by political protests in Islamabad against the government and by a legal challenge to the divestment.

“The oil sector generally is least preferred among foreign investors right now,“ said Atif Zafar, head of research at JS Global Capital, a Karachi brokerage. ”When it (Oil and Gas Development‘s offering) all started, it was a good time. By the time it was realized, it wasn’t.”

Officials said the sale would have been a major boost to Pakistan’s fragile economy, which was hit by political unrest in August, when two opposition leaders, sportsman-turned-politician Imran Khan and Muslim cleric Tahir ul Qadri, marched on Islamabad with thousands of supporters for a sit-in, alleging election fraud and demanding Prime Minister Sharif’s resignation.

http://online.wsj.com/articles/pakistan-abandons-sale-of-some-of-it...

[Riaz Haq]

From Express Tribune:

Karachi Stock Exchange’s (KSE) benchmark 100-share index increased 369 points to reach 31,299.97 points, Express News reported on Monday.

Since the start of trading today, shares of 200 companies increased while shares of 44 companies declined.

The previous peak of 30,593 points came on November 5 which analysts credited to falling inflation and commodity prices as well as to easing of political tensions.

Official data has showed that inflation had plunged to a 17-month low, raising investors’ hopes that the central bank might slash the basic interest rate in its next review.

The country’s long-moribund economy has shown some glimmers of revival under Prime Minister Nawaz Sharif’s government.

Ratings agency Moody’s upgraded the country’s outlook to ‘stable’ from ‘negative’ in July, citing its improving external liquidity position and commitment to reforms.

http://tribune.com.pk/story/788515/record-high-kse-100-index-moves-...

[Riaz Haq]

Three Pakistani companies added to MSCI FM small cap index

KARACHI: MSCI, a leading provider of investment decision support tools worldwide, has announced the results of semi-annual index review for MSCI equity indices.

Analysts noted that in the seven months of this year, Pakistan attracted foreign portfolio investment (FPI) inflow of $427 million, which accounting for 20 per cent of the cumulative net inflow of $2.2 billion seen by the frontier markets (FM) during the period.

Although there were no additions or deletions to MSCI FM 100 index during the semi-index review, the MSCI FM small cap index saw the highest additions of three companies from Pakistan.

Currently, the country has 15 companies in MSCI FM index, i.e. OGDCL, MCB, FFC, UBL, POL, ENGRO, NBP, HBL, PPL, PTC, FATIMA, PAKT, KEL, LUCK and PSO.

The small cap index would now include Indus Motors; Murree Brewery and Lafarge Pakistan Cement from Nov 26, 2014.

As a result, Pakistan’s representation in the MSCI FM small cap index would be 23 companies and 12 companies in the main MSCI FM 100 index.

Analysts at AKD Securities observed: “Pakistan’s weight in the MSCI FM 100 index has increased to 7.8pc at the end of Oct’2014, up from 3.8pc six months ago. It is the fourth highest after Kuwait, Nigeria and Argentina with weightage of 23pc, 13pc and 10pc, respectively.”

http://www.dawn.com/news/1142977

[Riaz Haq]

German Chancellor Angela Merkel has received Pakistani Prime Minister Nawaz Sharif in Berlin. Sharif is keen for German investment, but Merkel expressed wariness over the security situation in Pakistan.
Nawaz Sharif and Angela Merkel walk past an honor guard
German Chancellor Angela Merkel met with Pakistani Prime Minister Nawaz Sharif on Tuesday and held talks that focused mainly on trade and fighting terrorism. In a press conference, Sharif told reporters how keen his nation is for German investment, although Merkel cited security concerns in her own comments.
"Pakistan is facing an acute shortage of energy," Sharif said before praising Germany's role as a leader in renewable energy and adding that several German firms were keen to invest in Pakistani power companies. However, Merkel said that Pakistan needed to create "a climate that is friendly for investors," meaning that it must beef up its security if it seeks an increased German stake its economy.
Germany is Pakistan's fourth-largest trading partner. Bilateral trade amounted to 1.9 billion euros in 2013. Although Germany's economic involvement in Pakistan has been primarily in the form of exports; specifically chemical products, machinery, and vehicles, Pakistan is courting German investors not only for the energy industry, but in the agricultural and environmental sectors as well.
Stopping terrorists 'at all costs'
Merkel's concerns stem from the fact that Pakistan has been plagued by Islamist violence since it backed the US-led coalition to topple the Taliban in Afghanistan in 2001. Sharif assured Merkel that his country would "overcome terrorism at all costs."
Shortly before Sharif left for Berlin, he assured Afghan President Ashraf Ghani that he supported Ghani's offer to hold peace talks with the Taliban, who also control some parts of Pakistan along the border. The countries have been urged to improve their relations.
The German chancellor echoed Sharif's hope for a safe Afghanistan, saying: "We want as much as you do that what has been achieved in Afghanistan is not threatened ... a stable Afghanistan is in the best interest of Pakistan."
Merkel also confirmed on Tuesday that the German army will remain in Afghanistan after the NATO combat mission comes to an end in December. Some 800 Bundeswehr soliders will remain to train and advise the Afghan military.

http://www.dw.de/pakistan-pm-sharif-and-merkel-talk-trade-terrorism...

[Riaz Haq]

Pakistani stocks today set a new record with benchmark KSE-100 scaling the 32,000-point level for the first time in its history as investors cheered the recent interest rate cut by the country's banking regulator......Analysts say foreign fund managers showed exceptional interest in the market and it is expected that the bullish trend may continue at the bourse in the coming days.

http://www.business-standard.com/article/pti-stories/pakistani-stoc...

[Riaz Haq]

KARACHI: The inflows of foreign direct investment (FDI) in Pakistan surged by a significant 47.1 percent to $423.8 million in the first four months of the current 2014/15 fiscal year, the central bank said on Monday.

The FDI over tripled during the month October to $254.3 million against $57 million in the same period last year due to improvement in political environment. However, portfolio investment in the month was recorded at negative $2.2 million as against $33.5 million in September last year.

China contributed $167.3 million to the total inflows in the month.

Ahsan Mehanti at Arif Habib Corporation said the inflows that were on halt in the previous months due to political uncertainty materialised in October.

“The government also expedited its efforts after witnessing political ease in October. Energy, auto and textile sectors observed some expansions during this period, which increased the inflows.”

Schehzad at Lakson Investments said there were expansions, particularly in the telecom sector after the award of 3G licence, which invited inflows.

“There has not been any significant shift in the mindset of the foreign investors or installation of any mega project in the country. There has been small-scale expansion in the working capital in oil & gas and power sectors, which improved the numbers,” Schehzad added.

Overall, foreign private investment increased by 66 percent to $600.1 million in the period under review, primarily because of huge surge in the FDI flows during October.

Portfolio investment in the four-month (July-October) period was recorded at $176.3 million as compared to $72.2 million in the same period last year.

Schehzad said the stock market is performing and returns are impressive, which is attracting investment. Moreover, the increase of Pakistan’s market weightage to 7.02 percent in the MSCI FM index resulted in heavy portfolio investment.

The United States remained the largest contributor in the FDI with an investment of $100.1 million during the four-month period; followed by Switzerland with $93.9 million and Hong Kong with $59 million.

As far as the portfolio investment is concerned, the US injected $162.2 million in the country’s equity market; followed by Switzerland with $99 million, while Norway pulled out $71.1 million from the country’s bourse.

http://www.thenews.com.pk/Todays-News-3-284852-FDI-surges-by-47-per...

[Riaz Haq]

Pakistan In Line For Upgrade to Emerging Market Status

Index provider MSCI has revealed it plans to consider upgrading Pakistan from frontier- to emerging-market status next year.

Citing “a number of positive developments over the course of the past 12 to 18 months,” MSCI said it would include Pakistan on its 2016 review list.

News that Pakistan is being considered for inclusion in the MSCI emerging markets index will be seized upon by a government desperate for international recognition of what it says are its achievements in stabilizing the Pakistani economy.

The government of Prime Minister Nawaz Sharif, who came to power in June 2013, inherited low growth, high inflation, a foreign-exchange reserve crisis and crippling electricity shortages. Since then, inflation has dropped sharply and foreign exchange reserves are more comfortable.

The government is now on a mission to boost economic growth from the anemic 3% that it inherited to around 7% by the end of its five-year term. The IMF expects GDP growth to hit 4.3% this year and rise to 4.7% in 2016.

Pakistan has already achieved recognition among frontier-markets analysts, including Renaissance Capital, which describes the country as “the best undiscovered investment opportunity in emerging or frontier markets.”

However, considerable challenges remain. The country is woefully short of electricity, for example, while plans to seriously boost the paltry tax revenues are also yet to come to fruition.

Tax revenues currently stand at around 10% of GDP.

The IMF, which rescued Pakistan with a $6.6bn loan program in 2013, agrees that progress is being made. The multilateral said last month that “strong implementation of reforms… will transform Pakistan into a dynamic emerging market economy.”

Pakistan is banking on help from China, which has a $46bn investment plan intended to address the country’s energy deficit and put in place other infrastructure for industrialization that it is hoped will change Pakistan’s economic trajectory.

The Karachi stock market has delivered stellar performance in recent years. Since the May 2013 election, it has gained more than 70%. News on the possible inclusion in the emerging markets index—a decision on that will be made by MSCI next year—had little immediate impact on the market on Tuesday.

Pakistan was last in the MSCI emerging markets index in 2008 and brokers said its re-inclusion would be positive.

“Not only size of passive fund flows will increase, many large [emerging markets] funds may return back to Pakistan,” Karachi brokerage Topline Securities said in a note on Tuesday.

http://blogs.wsj.com/frontiers/2015/06/10/pakistan-in-line-for-upgr...