MSCI upgrade disappoints

Pakistan equity market after a hiatus of almost nine years finally became part of the MSCI Emerging Market index. However, going by the word on the street and the price action on the bourse it seems that the market has been downgraded. It has been a blood bath to say the least and the market participants are looking around for answers but are not getting any.

Over the last twelve months various reports discussed the potential new inflows that will come into the market from passive emerging market funds. Most estimates averaged around inflows of $400 million. On 31st May, the re-balancing date, the market received inflows of about $452 million but the outflows were even greater with $534 million. Apart from index tracking funds, the foreign active discretionary funds also came to sell.

The six major stocks that were added to the emerging market index OGDC, HBL, UBL, LUCK, MCB and ENGRO hit their lower circuit breakers and the index dived down 1200 points only to close at 860 minus just because of an elongated adjusted closing implemented just for the MSCI upgrade.

The real sell-off though came on Monday when the market opened 700 points lower and after a brief recovery to break-even levels, a magnanimous onslaught started which took the benchmark KSE-100 index down 2,200 points (4.6 percent).

Across the board, market participants seem to be disappointed with the whole MSCI upgrade episode which has turned out to be an anti-climax. But what needs to understood is that foreign funds have seen the movie before especially in Qatar and UAE where there were huge sell-offs post the upgrade. The minimum deployment by index tracking fund has been done but to expect active funds to pour in their money without considering the risks was a bit too optimistic.

The biggest risk factor for the active funds is the currency. A five to ten percent depreciation here would set them back. For them it is not a risk worth taking. Whereas, local investors and institutions are of the view that the government would keep the exchange rate steady. An outsider to the local system cannot be expected to hold similar views.

It looks like the KSE-100 index has peaked around 50,000 level. The MSCI event has occurred and overall the budget was negative for the equity market. After a great run, a correction here would be healthy.