Foreign investors sell $141mln worth of shares last month

KARACHI: Pakistan’s bourse sharply dropped on Thursday as selling by local investors and frontier market funds more than offset the inflows related to the country’s upgrade to MSCI’s emerging market Index. 

The KSE 100-share Index on Thursday fell 3.58 percent, its biggest daily decline since August 2015. “A lot of traders built positions in the market expecting strong closing due to the MSCI-related inflows,” said Shahid Habib, chief executive officer at Arif Habib Limited. “Contrary to expectations, the index underwent correction and market overreacted.”

Passive inflows of around $400 million are expected following the upgrade of Pakistan to emerging markets index of Morgan Stanley Capital International (MSCI), effective from June 1. US Index provider MSCI reclassified the country as an emerging market from frontier market status and added six securities in its main board and 27 shares in small-cap index.

The benchmark KSE 100-share Index of Pakistan Stock Exchange (PSX) shed 7.325 percent in the last four days, while market capitalisation shrank 6.26 percent. Funds, tracking the MSCI frontier markets (FM) Index to which Pakistan previously belonged, were due to sell part of their investments. 

In May, foreign portfolio investors remained net sellers of equities worth $141.18 million. “Local institutions, including capital protected mutual funds and high net worth individuals, also had to unwind their positions,” Habib said. “This (however) was an unexpected turn of events.”

The market, betting on MSCI EM flows, expected a bullish rally of around 4.0 percent in the last two days of May. However, the market remained in the correction mode and foreign portfolio investment kept on draining, which sparked a panic selling by all classes of investors.

“While it is difficult to say with surety, we believe there can potentially be three reasons for selling by the foreign investors: selling by FM tracking funds, exit opportunity for funds having heavy positions in Pakistan because of available liquidity and selling from active EM funds and proprietary books’ international broker dealers,” said Atif Zafar, an analyst at JS Global Capital.

The benchmark KSE-100 closed an eventful May 2017 with a return of 2.6 percent despite the market’s fall. 

May also witnessed the federal budget’s announcement, which was largely termed undesirable for the equity market. Trading activity also picked up during the month with average ready volumes clocking in at 338 million shares/day.

In May, the best performing sectors were engineering (up 21 percent), oil and gas (rising 13 percent) and automobile parts and accessories (increasing 12 percent), while cement (down 5.0) percent and pharmaceutical (decreasing 4.0 percent) sectors were the major laggards.