Free-float based index implementation welcomed

The much-awaited free-float based index methodology has finally been implemented on Monday, which was welcomed by the market participants, analysts said. The KSE-100 index calculation would now be done through the free-float market cap (ex sponsors holding, government holding and locked shares) instead of the total market cap.
"The recent re-composition of the benchmark index post demutualization of the stock exchanges seems a positive step towards a more representative depiction of stock exchange movements and for individual investors who take investment decisions on the basis of index movement", Furqan Punjani, an analyst at BMA Capital said. With this shift, the index would once again start reflecting the actual market movements in stocks that are frequently traded, he added. The benchmark KSE-100 index as of now is up by 03% to 15,737 points.
"To recall, the benchmark KSE-100 index (now phased out) was a market cap based index where market caps (stock price into total number of shares) were used to determine the weights for individual stocks and hence their points contribution", he said. However, any abnormal flows in high priced illiquid stocks (hardly owned by local investors) resulted in abnormal index movements. And this anomaly became apparent in FY11 as foreign participation in scrips like OGDC, NESTLE and ULEVER (where owners detained a major portion of their holdings in locked-in accounts), led the index to inflate by 29 percent whereas the index inched up by only 18 percent ex these three scrips.
"Failure to reflect the true essence of market sentiment and stock movements by the previous total market cap based benchmark index, urged the introduction of a free-float based index", he said. Now instead of taking into consideration the total market cap, the recently introduced index will trace the free-float based market cap (stock price into free-float number of shares ie ex-owners' locked in shares). Henceforth, the recomposed KSE-100 index would allocate higher weightage to companies with a higher free-float market cap and would depict the actual performance of market in shares that are easily tradable. Hasnain Asghar Ali at Escorts Capital said that the change in methodology of computation was indeed welcomed by the market participants and the benchmark truly reflected the activity.