Firm Holdings Sets Stage For Entry Into Emerging Markets

Akd Securities Limited.

Foreign equity participation in our market remains strong with their share in the free float being broad based. Remaining sturdy at 27.8% of the free float, foreigners own a combined share amounting to US$5.1bn in the KSE-100 constituents. 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 Oil (OGDC, PPL, PSO) remains in favor. With the upcoming MSCI EM index review slated to raise the local market’s profile, invite foreign liquidity and is expected to propel market sentiment.

Foreign holding

Remaining sold on Pakistan’s potential for delivering returns; foreign holdings have remained in place and amount to 27.8% of the free float of KSE-100 index companies. With combined ownership of US$5.1bn, a sector wise break up of holdings shows that Fertilizer (ENGRO, FFC, FATIMA), Banks (BAFL,UBL,MCB,NBP) and contrary to wider sentiment Oil (OGDC, PPL, PSO) remain in favor.

Entry in EM index: 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 SECP and other participants involved.

Outlook

EM index constituents stand at average/median market capitalization of US$3.9bn/2.1bn vs. FM index figures of US$0.7bn/0.5bn showing a 5x increase. Additionally, the country weights in the EM 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 EM 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$95.2bn track the MSCI Emerging market index, far outstripping comparative funds tracking the FM index approximating US$3.4bn, with Pakistan having a potential weight of 0.13% (MSCI Simulation). We 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.