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PSX – Knock-back at MSCI

MSCI downgraded and relocated four Pakistani Stocks from its Index Series. The Stocks of MLCF and HONDA CAR were removed while LUCK and UBL were DOWNGRADED by-one NOTCH.

smkBloomberg carried out a special report and explained the circumstances which may lead towards an eventual downgrading of Pakistan Stock Exchange. This DOWNGRADING is feared because of increasing volatility, declining volumes and appreciating impact costs at PSX.

BBC also took a note of this alarming situation and observed that “PSX was being run like a casino“, while a leading newspaper saw an elephant in the room.

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Higher Volatility without substantial volumes is the main cause of concern and a big reason to worry about. Bloomberg’s augury about Pakistan’s downgrading, and BBC’s acrimonious remarks (PSX was being run like a Casino) are instigated by this core issue which is circumventing local and foreigners to enter the Pakistani Capital Market.

Recent higher fluctuation, foreign-selling, and volatile rollover-weeks are the common grounds where the ill-fated games of 2005 and 2008 were played. During these Crashes, KSE-100 Index declined by 30% (over 3,000pts), and 63% (over 4000pts) within just one-and-half-dozen trading sessions approx. This time-around, KSE-100 Index between movement between 36,000 and 40,000 levels is taking place between mere 5-8 trading sessions—which is not a good omen for a market which spent eight years in telling the world that we are now a “mature marketplace and a better investment destiny.”

The period between March 1, 2018 and November 1, 2018 eroded market capitalization worth $19.97, which is about $8.29 billion higher than the one eroded in the infamous fiasco of March 2005. pic2

Bloomberg’s latest view on Pakistan impresses upon the need to take an account of 2008 and 2018 situation:

2008 2018
2008 downgrading by MSCI was instigated by outrageous 2008-Crash, incited by the imposition of the Floor that restricted trading to take place only on the COB-prices of August 27, 2008 or at Index level of 9144. No similitude:

  1. Floor is not imposed
  2. Index is not frozen
Upon the lifting of the Floor on December 15, 2008, KSE-100 Index fell by 58% within 15 trading sessions. No parallels.
Volumes were historically low, Impact Cost was higher, investor interest and foreigner’s participation was miniscule Many parallels and similes:

  1. Volumes are historically low
  2. Volatility is higher rather “Casino” Styled
  3. Foreigner’s participation low
  4. Local interest low
This time-around—however, overarching surrounding may not be the same, but technical aspects i.e. volumes, values, impact cost, and ATVR are much or less similar to the 2008 situation.

The next MSCI review is due to take place in May 2019. Alluding to the MSCI Criteria, at-least three Pakistani companies are required to meet the size and liquidity requirements. Given below matrix present an aerial view of our performance for the period between June 1, 2017 and November 12, 2018.

MSCI
size and liquidity requirement
“There should be at least three companies having the Market Capitalization of 1594 million dollars, Free Float Market Capitalization of 797 million dollars and ATVR of 15%”
OGDC HBL MCB UBL LUCK
Free Float Market Cap ($) 729,886,100 752,479,008 616,685,574 498,864,448 451,279,142
Market Capitalization ($) 4,866,959,793 1,505,830,605 1,932,668,755 1,248,875,011 1,131,276,350
Jun 1, 2017 Price 168 260 211 262 819
Nov-12-2018 Prices 152.02 137.91 200.11 137.05 469.96
Present Status Borderline borderline borderline downgraded downgraded
The situation is grim as none of the above stocks met the Free Float Market Capitalization Requirement as at COB November 12, 2018. PSX deleting will eventually deprive Pakistan of a sizeable foreign portfolio investment that comes for free. All we have to do is to make PSX a safer place for Investor which bring liquidity, volumes and values.

Bloomberg also hinted that “JOINING of MSCI-EM CLUB BY CHINA and BRAZIL” also has a play in the declining volumes and rerouting of FPI to new members of the Club. Earlier in 2015, when Chine-A stocks were not alleviated to status of Emerging Markers, Chinese view and strategic vision about Pakistan had a lot of excitement and a will to list Chinese Capital, Raise Money for CPEC and Fetch Chinese Investor to a Market that was one pedestal-up.

But the GREEN SCENE got BLUE when China got alleviated to the Rank of Emerging Markets. Now Pakistan and China are competing for the same foreign portfolio investment as they happen to be in the same ring. Analysts estimate about $20 billion will initially flow into Chinese stocks, and the amount shall eventually rise to $300 billion, in case of full inclusion, as many market watchers expect.

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Will China look at us as friend or would it simply treat us like a competitor when it comes to sharing the very same bucket, where Pakistan is eligible to raise for about 0.079% of the 1.6 trillion dollars for free.

Our friendship is higher than the Himalayas and deeper than Oceans, yet can these words impress upon China to direct a shred of its own to tune of 0.079% of 1.6TR$s to Pakistanis Capital Market by way of holding securities in the Bank of China.

Chinese market returns are seldom in two digits, whereas Pakistani Capital Market returns are rarely in single digits. The Pak-China currency swap agreement would some meaning when Bank of China becomes the fourth custodian bank and starts holding securities of the Chinese who invested in Pakistani Securities Market. This is the only win-win proposition, otherwise, Industry situation is only favorable to Chinese and nonetheless, the balance of trade shall always be tilted towards Chinese.

Should this issue of HYBRID DERIVATIVES remain as it is, Pakistan would never lose even a single penny to Chinese as foreigners do not have good record too. And In case, this subject matter is addressed in accordance with international best practices, China will start losing FPI which it might be getting on account of homegrown Product Portfolio persisting at PSX. Hence, it can be stated that China’s Upgrade to Emerging Market appears to be a trump card, played well by the US based Index Provider, MSCI.

 

Against all these odds, one man who is poised to steer this market out of the challenging situation because of his alacrity and an impeccable vision is Mr. Richard Morin, who took the office of the Exchange in January 2018. Commitments for New Listings, Activation of SME Board, Bringing Traction in the Cash-Settled Futures are the some stereo type pledges which (google will confirm) every CEO makes in the Boardroom and in the public with journalists.

Morin is a different CEO, he made a conspicuous commitment to increase the Investor Base by ten folds within three years term of his service—which is great. In May 2019, Mr. Morin would have completed his half term, and by then, the Investor Base should stand at 1.25 Million. Should this happen, MSCI would not have any chance to even think about PSX downgrading and BBC shall definitely have a sound remorse to what it did by calling PSX a “Casino“.In case, if that does not so will, it would certainly cast doubt over the collective wisdom of PSX Board in many aspects.

The depth and liquidity is the function of Investors and Issuer’s reposed confidence in the frontline SROs. There is a need for an integrated effort to restore normalcy so as to enable SROs to look at the Investors’ and their issues, failing which PSX may lose its hard won EM Status in MAY 2019

The author is the CEO of Securities Exchange Management Suite and a former General Manager, Pakistan Stock Exchange (PSX)

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