KSE’s stellar performance may put it back on MSCI radar

By Kazim Alam, The Express Tribune

KARACHI: Last month was unusual for the Karachi Stock Exchange (KSE) in more than one way. Not only did its benchmark index outperform all regional markets by posting a month-on-month gain of 15%, its year-to-date gain at the end of May was a staggering 29%.

In contrast, the year-to-date gains of all key emerging and frontier market indices have been far less – China (5%), India (0.9%), Russia (-15.5%), Brazil (-12.2%), Indonesia (14.9%), Malaysia (4.6%) and South Africa (7%), according to Yardeni Research Inc, a US-based research firm.

This is the highest monthly gain in the benchmark KSE 100-Share Index since March 2009. That is not where it ends. May marks the highest monthly volume traded, as well as the strongest monthly foreign portfolio investment (FPI) flows in last five years.

“The victory of the PML-N in the May 11 polls added the right ingredient to carry [the] market’s momentum forward, where a single party-led government versus a coalition government was seen as a better lead for swifter reforms and policy implementation going forward,” said a research note issued by KASB Securities on Monday.

Going forward

Speaking to The Express Tribune, AKD Securities Head of Research Raza Jafri said the robust performance of the Karachi bourse since the beginning of 2013 in general, and during May in particular, has rekindled hopes of Pakistan re-entering the MSCI Emerging Markets Index.

MSCI provides global benchmark indices for equity investments for more than 70 countries. Currently, Pakistan is placed in the MSCI Frontier Markets Index. Its possible elevation to the Emerging Markets Index is likely to result in heavy FPI, as a majority of global funds uses MSCI indices to make investments.

FPI net inflows into the KSE in May were $271 million, as opposed to $28 million in April. This means that, year-to-date, net FPI inflows remained $370 million, which is 4.7 times higher on a year-on-year basis.

“My estimate is that even if we disregard the Unilever-related inflows, we have received more FPI in the last five months than we did in the entire 2012,” Jafri said. “A strong performance has put us on the radar of MSCI, which will definitely not want its clients to miss out on solid investment opportunities in the Pakistani stock market.”

Although the market has re-rated to a multiple of 8.3 times (based on 2013-estimated earnings) as opposed to 6.6 as on December 2012, Jafri believes it is still cheap and offers an investment opportunity that is not available elsewhere.

In terms of the share price-to-earnings ratio, the term ‘multiple’ reflects how much investors are willing to pay per rupee of earnings. A multiple of 8.3 means that investors are willing to pay 8.3 times the current earnings per share for all KSE-100 Index stocks.

“The multiple of 8.3 is based on the estimated earnings of 2013, which is about to end. We should be looking forward to a multiple of less than eight in 2014 in view of expected growth in earnings,” Jafri said.

Published in The Express Tribune, June 4, 2013.

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