KARACHI: With only two days left before Pakistan’s formal inclusion in the MSCI Emerging Market Index, the Pakistan Stock Exchange (PSX) and major brokerages are bracing for what they see as a large inflow of foreign funds.

The gross amount of inflows is likely to be five to six times the PSX daily turnover as per the estimates of some market players.

The inflow can start from today, but the high tide is expected on Wednesday – possibly in the last hour of trading – as MSCI-tracking passive funds barge their way through the local bourse.

“We can expect a flow of between $300 million and $500m from passive investors/index funds over the next few days,” said Farid Khan, CEO of HBL Asset Management. “The inflow will only be in a limited number of blue-chip stocks and is unlikely to impact the broader market. Only a handful of stocks are likely to be affected,” he said.

Mr Khan said the market has been anticipating this move for the past few months. “So a large part of this is already discounted.”

International passive funds are likely to invest in the Pakistan market according to its weight in the MSCI Index. In contrast, active funds may invest at leisure.

Market players expect immediate inflows of $300-500m from passive funds after the country’s reclassification by MSCI on June 1

A major brokerage house estimates that out of $1.4-1.7 trillion that tracks the MSCI Emerging Market Index, about $350bn consists of passive funds. As per its weight of 0.14 per cent in the index, Pakistan may be able to pull in $450m. But the estimates of stock strategists about the inflows on Wednesday vary widely.

The worried and nervous souls wonder if the PSX has the capacity to handle such a huge sum given that the current daily traded value amounts to just $150m.

Conversations with the heads of equity sales at several brokerages gave an impression that they had prepared months in advance to handle these inflows. “It has to be seen from where the demand arises: local participants or foreign investors. Despite persistent selling, foreign investors are still believed to hold stocks worth $7-8bn and have a fair share in the market free-float,” the head of equity sales at a brokerage said.

Another major market player stated that not each one of the 300 or so PSX brokers caters to foreign investors. Major business of foreign funds rests with big brokerages that can be counted on the fingers of one hand.

He said brokerages that deal in large transactions with foreigners do have the execution and settlement capacity. “Although we do not see any trouble in handling such huge gross foreign inflows, my sales and research teams will be at their desks at 6am on Wednesday as the stock market in Hong Kong opens three hours earlier,” said the head of equity sales and research at a large brokerage.

Published in Dawn, May 30th, 2017