Holding by foreigners in Pakistan equities market

pakistan-flagWhile many Pakistanis often express their serious concerns about country’s economic outlook, holding by foreigners shows their strong belief in many of the companies included in KSE-100 index. One of the latest report by AKD Securities has highlighted this, which needs sharing with local as well as overseas investors.

Participation in Pakistan market remains strong with their share in the free float being broad based. Estimated around 28% of the free float, foreigners own a combined share amounting to over US$5 billion in the KSE-100 companies. Breaking down the 50 largest companies by market capitalization, shows that Banks (BAFL, UBL, MCB, NBP), Fertilizer (ENGRO, FFC, FATIMA) and contrary to wider sentiment Energy (OGDC, PPL, PSO) remain their favorite.

With the upcoming MSCI EM index review likely to raise the local market’s profile, invite foreign liquidity and is expected to propel market sentiment. However, stringent market classification criteria must be met, with particular attention paid to accessibility criteria, including openness of foreign ownership and stability of institutional framework.

While, pitfalls of inclusion in the EM index will remain, in the long run inclusion bodes well for the local market participants. The brokerage house expect enhanced activity in scrips poised for inclusion in the index as a result of MSCI’s simulation exercise (on April’15), namely OGDC, MCB, UBL, FFC, LUCK and ENGRO.

The MSCI review process for Pakistan’s inclusion in its Emerging Market Index is expected to take place in May’16. In this regard local markets must meet stringent classification criteria, with particular attention paid to accessibility criteria, including openness of foreign ownership and stability of institutional framework. In this regard, the process of demutualization and consolidation of exchanges in Pakistan is a welcome. Moreover, the enactment of a regulatory framework and cohesive regulation remains a test for the apex regulator, Securities and Exchange Commission of Pakistan (SECP) and other market participants.

Emerging Market Index constituents stand at average/median market capitalization of US$3.9 billion/US$2.1 billion. Additionally, the country weights in the Emerging Market Index are dominated by China (25%), Korea (14%), Taiwan (12%) and India (8.5%), raising contentions of Pakistan being similar to Dubai and Qatar as they entered the Emerging Market Index, being weighed down by larger market constituents, where their weightage in the overall index stands at a combined weight of 1.8.

That said, a plethora of funds (primarily ETFs) with AUMs exceeding US$95.2 billion track the MSCI Emerging Market Index, far outstripping comparative funds tracking the Emerging Market Index approximating US$3.4 billion, with Pakistan having a potential weight of 0.13% (MSCI Simulation).




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