Pakistan's transition from Frontier to Emerging Markets MSCI led to sale of $530 million Frontier stocks and purchase of around $350 million emerging market stocks leading to a bearish stock market. This was the outcome of background interviews with sources in the Pakistan Stock Exchange (PSX).
There is no available data as to who purchases or sells stocks but the assumption is that Frontier Market Index fund managers, representing specific companies, sold shares while Emerging Market Index fund managers replaced their respective investments to comply with the index reclassification status of Pakistan market. The discrepancy between the two is being attributed to political uncertainty and changes in capital gains tax (CGT) in the budget for the current fiscal year.
Sources added that even though Emerging Market players purchased on June 1, 2017 and Frontier Market players sold stocks, yet more buyers would enter the market as soon as political issues are resolved. To another query regarding Capital Gains Tax as modified in the budget 2017-18, sources said that it had a negative impact on the market with several investors who were urging CGT be rationalized were flummoxed at the changes in the budget.
According to stock market experts, MSCI- Emerging Market Index is composed of large cap companies of the listed universe of emerging market countries. MSCI selects the companies with the largest capitalization in the stock markets of countries included in its emerging markets classification; Pakistan companies with the largest capitalization have been included in the MSCI emerging market index.
Although Pakistan has been included in a better representative index and higher classification category for the emerging markets, however weight-age of PSX listed companies in emerging market index is quite negligible at 0.14 percent as opposed to the weight-age enjoyed by Pakistan in Frontier market index classification at 9.5 percent, they added.
The six Pakistani companies listed in the emerging market are: (i) Engro (weight in MSCI in Pakistan 13.5% and weight in MSCI EM 0.021), Oil and Gas Development (weight in MSCI in Pakistan 14.3% and weight in MSCI EM 0.022%) Habib Bank (weight in MSCI in Pakistan 24.2% and weight in MSCI EM 0.037%), MCB(weight in MSCI in Pakistan 13.3% and weight in MSCI EM 0.020%), United Bank (weight in MSCI in Pakistan 17.5% and weight in MSCI EM 0.027%), Lucky cement(weight in MSCI in Pakistan 17.3% and weight in MSCI EM 0.027%).
These six companies were also part of the Frontier market which constituted 30 additional companies. Other large companies in Frontier market included OGDC, Habib bank, MCB, PPL, K-electric, and UBL. Middle companies included Lucky Cement, Fauji Fertiliser Co, Engro Corporation, Hub Power Company, National Bank of Pakistan, Pakistan State Oil, Indus Motor Company, Fatima Fertiliser, Pakistan Telecom and KAPCO. Small companies included Fauji Cement Co, Dawood Hercules Corp, Packages, Pakistan Oilfields, Fauji Fertiliser Bin Qasim, Searle Pakistan, Maple Leaf Cement, Bank Alfalah, Pak Suzuki Motor Company, Kohat Cement, Attock Petroleum, Nishat Mills, Ferozsons Laboratories, Sui Southern Gas Co, IGI Insurance, Askari Bank, Shell Pakistan, Pak Elecktron, Millat Tractors and National Refinery.
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