Pakistan's KSE-100 Outperforms Global, Emerging Market and Frontier Market Indices
jumped 60% in dollar terms—outpacing global indices as well as MSCI Emerging Market Index and Pakistan’s peers among frontier markets. Pakistan's KSE-100 index was among the top 5 performers in the world in 2013. In recent months foreigners, who kept piling in even as jittery local investors began selling, have bought a net $36m-worth of shares in August, when the PTI and PAT protests were at their height, and a further $53m-worth in September, according to The Economist.
Over the next 6 months $2-2.5 billion of new float is expected to come on stream from Pakistan through government's privatization of assets which should take its MSCI frontier market weightage higher to 9-9.5% with its subsequent effects on passive flows, according to a report in Baron's.
Market classifications of securities from various countries into developed, emerging and frontier indices are made by Morgan Stanley based on a minimum market capitalization and size of free float.
Here's how Morgan Stanley explains it:
In order to be included in a Market Investable Equity Universe, a company must have the required minimum full market capitalization. This minimum full market capitalization is referred to as the Equity Universe Minimum Size Requirement. The Equity Universe Minimum Size Requirement applies to companies in all markets, Developed and Emerging, and is derived as follows:
1. First, the companies in the DM Equity Universe are sorted in descending order of full market capitalization and the cumulative coverage of the free float‐adjusted market capitalization of the DM Equity Universe is calculated at each company. Each company’s free float‐adjusted market capitalization is represented by the aggregation of the free float‐adjusted market capitalization of the securities of that company in the Equity Universe.
2. Second, when the cumulative free float‐adjusted market capitalization coverage of 99% of the sorted Equity Universe is achieved, the full market capitalization of the company at that point defines the Equity Universe Minimum Size Requirement.
3. The rank of this company by descending order of full market capitalization within the DM Equity Universe is noted, and will be used in determining the Equity Universe Minimum Size Requirement at the next rebalance.
As of April 19, 2011, the Equity Universe Minimum Size Requirement is USD 140 million. Companies with full market capitalizations below this level are not included in any Market Investable Equity Universe. The Equity Universe Minimum Size Requirement is reviewed and, if necessary revised, at Semi‐Annual Index Reviews.
In a recent interview with Forbes, Mohammad Sohail of Topline Securities in Pakistan has expressed confidence in the country’s capital markets moving forward:
"Things that were held up due to the protests – IPOs, privatizations, reforms, the $800 million share sell of our largest oil and gas company OGDC – have now resumed. When the OGDC deal is executed, I think that will give a very clear signal to the international business community that the protests may still be going on, but investment and business already are operating as usual. Pakistan is an unexplored market by most outside investors that is not marketed properly. Compared to peers, the market is very cheap. Pakistan’s markets trades at a price/earning multiple of 7.5 times; a 30% to 40% discount to Sri Lanka, Bangladesh, Nigeria and Vietnam. For me, from an investor’s point of view, the next 24 months look very positive for the equity markets."
Increase in Pakistani shares weight in Frontiers Index and expected re-entry in Emerging Markets Index are both welcome developments for Pakistan's economy. As a result of these developments, Pakistan should expect new capital inflows which would strengthen Pakistan's balance of payments position and spur the nation's overall economic growth.
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