MSCI stimulating the volumes

Fraternity matters. And in some cases, like the case of the inclusion of stocks in MSCI indices, the excitement leads to heightened sense of activity even before you have joined the club.
Last week, this column commented on whether the inclusion of any company in MSCI index leads to immediate capital gains in the respective stock (See BR Research article: MSCI inclusion and capital gains, Published May 19, 2014). Based on historical data, the column noted that the inclusion in MSCI does not have any bearing on short-term price performance of freshly added scrips. However, it pointed out that it is the turnover that starts gaining momentum once these stocks join the MSCI index.
To recap, MSCI recently announced the addition of four new companies from Pakistan in MSCI Frontier Market Index and nine companies in MSCI Frontier Market Small Cap Index. And what is interesting to note that while these companies are yet to actually join the indices (the date of inclusion is May 30), total trading activity in these 13 stocks have picked up by 45 percent in seven trading sessions after the MSCI announcement versus seven days before.
The increase in average daily turnover in these thirteen stocks when compared to the increase in average daily turnover of KSE-100, which saw a meagre growth of only 4 percent during the same period, speaks volumes about the pre-inclusion excitement.
Of those stocks, whose volumes have picked up quite substantially after the MSCI announcement, Packages Limited (KSE: PKGS), K-Electric (KSE: KEL) and Pakistan Tobacco (KSE: PAKT) top the list. The average daily turnover of these scrips in the seven days after the announcement has risen notably by 157 percent, 91 percent and 71 percent, respectively, compared to the seven days before.
It appears that its the anticipation of increased foreign interest in these scrips that has kept the spirit of investors lively. Analysts also attribute the governments privatisation plan in blue chip companies that has shifted the focus of investors to side board items. Well, this might be the case as there are tittle-tattles in the stock market that the government might end up trading at a discount.
But, as to why only these three stocks have made it to the investors list of most preferred stocks, the analyst community has some valid grounds on hand.
According to industry participants, the turnaround story in K-Electric has recently caught the attention of many investors. Slowdown in transmission and distribution losses, significant improvement in profitability and rising efficiency in K-Electric have become the focus of foreign investors lately who have been eagerly flocking its counters.
As for Packages and Pakistan Tobacco, analysts maintain the view that its the healthy investment portfolio of the former and enhanced efficiency of the latter that has grabbed the focus of many sharp investors.
Still, while these three stocks have been able to see better growth in volumes than the benchmark index, the ongoing row over the Capital Gains Tax (CGT) rate might eventually result in drying the volumes across the board, said Vahaj Ahmed, a research analyst at brokerage Top Line Securities.
However, he adds that owing to positive developments on macroeconomic front, any increase in the CGT rate should not have any long-term impact on the market as sooner or later investors will have to knock the doors of the stock market! Thats an interesting point--one that adds to the reasons why the government shouldn succumb to the pressures and go ahead and increase the CGT; for, if the market is really going to be attractive on account of good macros then who could resist the charms of risings equities.