KARACHI: Pakistan entered the MSCI emerging-market index on Thursday — with nothing to cheer. At the close of the trading session, stocks at the Pakistan Stock Exchange (PSX) were bleeding profusely as the benchmark KSE-100 index succumbed to a record single-day decline of 1,811 points, or 3.58 per cent.

It was the biggest drop in terms of points.

In the past four days of a losing streak, the KSE-100 index has lost 3,856 points and the market capitalisation has eroded by Rs653 billion.

For over a year since the MSCI first signalled its willingness to take back Pakistan into the emerging-market fold, foreign funds, investors, local and foreign market analysts, brokers and agents were engaged in a prolonged celebration. The six stocks that were selected for inclusion in the MSCI emerging-market index continued to sell like hot cakes. Stock prices of Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development Company and United Bank rose phenomenally in the run-up to the upgrade, with buyers expecting to sell them at premium to emerging-market passive funds.

New York-based MSCI Inc is a leading provider of research-based indexes and analytics. It downgraded the Pakistani stock market eights year ago to its frontier-market index after the local bourse closed the exit door for foreign investors.

Almost everyone espoused inflows of $250m to $500m into the PSX from passive emerging-market funds/investors, mainly on May 31 and June 1. Big local brokerage houses and PSX officials were trotting the globe and returning with optimistic feedback from major Wall Street and Hong Kong firms.

So where did they go wrong?

The first signs that something was amiss were provided when foreign investors continued their selling spree in the PSX with a net outflow of $38.6m in May, unlike Qatar which had received buy orders of $469m and the United Arab Emirates got $160m leading to the day of inclusion in MSCI emerging-market index in 2014.

Against the universal expectations of huge inflows of around $500m on May 31 for which regulators and brokerages had made elaborate arrangements, at the end of the day, investors caught their breath as they witnessed all but a net outflow of $82m.

It looked like the smart foreign passive fund managers in the emerging markets waited while the foreign funds in frontier market resorted to sell-off in unexpected huge quantities, thus turning the tide from inflows to outflows. Some suspected that the emerging-market passive funds had entered through the off-market negotiated deals in the Negotiated Deal Market at prices of their choice.

Others blamed the political uncertainty, weak economic indicators and the recent budgetary measures of increased withholding tax on dividends and flat capital gains tax at 15pc to take effect from July 1.

But statements by optimists went to assuage some of the investors’ fears. Kamran Nasir, CEO at JS Global — the largest among the 14 brokerages that cater to foreign investors and which executed 30pc of all foreign orders on Wednesday, said: “The foreign side sell continued from those international funds that have not been able to take exit completely as they would have envisaged. Further, mutual funds were sellers (on Thursday) due to redemptions.”

He added that this slide of KSE-100 index had no negative relevance with Pak­istan’s inclusion in the MSCI emerging-market index and foreign buys could start flowing in shortly, stabilising the market. Analy­sts at Topline Securities argued, “Though Wednes­day’s gross buying activity of $452m was in line with our expectations, it was overwhelmed by gross selling of $534m”.

On Thursday, top-10 losers were Habib Bank which fell 4pc, United Bank 4.8pc, OGDC 4.7pc, Lucky Cement 4.7pc, Hub Power Company 4.1pc, Engro Corporation 3.8pc, MCB Bank 4.2pc, Pakistan Petrloeum 4.2pc, DG Khan Cement 4.6pc and PSO 4.4pc, taking away 876 points from the index. As blood splashed all on the trading screen, as many as 140 shares hit their lower circuits.

Published in Dawn, June 2nd, 2017

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