KARACHI – Pakistan was removed from MSCI EM in December 2008, maintained as a stand-alone index for five months and has been part of MSCI FM since May 2009. If the Egypt market follows a similar route and is made part of MSCI FM, Pakistan’s share in MSCI FM will also be impacted.
Based on performance market caps of February 2011 review, it will eat away 40 base points of Pakistan’s four percent share in MSCI FM. The Egyptian stock market continues to remain closed since January 27 with regulators concerned about potential selling (leverage unwinding, risk aversion, murkier earnings outlook) and retailer backlash upon re-opening the exchange.
If the shut down continues for 60 working days, MSCI could consider Egypt’s status as a member of MSCI EM index. The KSE has had a mixed first Quarter of 2011, while returns have been lower than historical averages. Combined with foreign flows, regional developments will play a part in shaping KSE; however, reintroduction of leverage after a gap of two years could help counter any potential pressures.
The crisis in MENA could also impact another MSCI related development for Pakistan. UAE and Qatar have been under review for an upgrade to MSCI EM since 2008. If they migrate to EM in the 2011 Review (implementation of any decision to take place in 2012); this could trigger a 1ppt gain for Pakistan in MSCI FM.
While both countries have not seen political unrest, sentiment spillover of MENA region remains a risk to upgrade these markets, said Imtiaz Gadar at KASB securities. He added that Pakistan remains dominated by IMF talks, while the adverse impact of politics, MENA crisis and Japanese calamity has attracted attention towards commodity prices. The Benchmark KSE-100 is oil heavy, providing a relative hedge against rising commodities.
However, past experience suggests that Pakistan’s status as a net oil importer becomes a driver of sentiments if oil continues to rise. During the 2008 oil boom, KSE multiples started de-rating post $108 per barrel mark (Arab Light; refer graph alongside). In addition, remittances, which have been a consistent performer despite macro volatility, will also be tracked. While 58 percent ME contribution to remittances could be a risk, also worth noting is the positive correlation between remittances and oil prices.
Trickle down impact of crises in MENA and Japan is likely as the energy chain should be impacted by changes in oil prices with follow through impact on input cost for manufacturers; phosphate fertiliser producers and importers near term margins should expand as prices rise on supply concerns, while automakers remain leveraged to the Yen. Given the importance of FPI in driving the KSE in last couple of years, potential outflow of foreign investments remains a key risk for the KSE.
Prolonged unrest in ME could trigger risk aversion by investors which could lead to outflows from Pakistan despite its relative non-correlation with the ME and Japan. The KSE has seen outflows of $9.0 million in the current month. The current year figure, however, remains at a positive $59 million. Dominance of foreign investors in driving the Pakistani market has coincided with discontinuation of leverage at the local bourses (early 2009).
However, effective March 14th 2011, the Margin Trading System (MTS) has been reintroduced. While, initial teething problems will mean that the product will take time to gather steam; smooth implementation of the product could help KSE counter any potential pressures, emanating from regional crisis.
