BE2C2 Report: Irshad Salim; Dec 17, 2016 — Pakistan stock exchange (PSX) — Asia’s best performing market may attract foreign inflows of more than 400 million dollars next year due to attractive returns (more than 38 percent before taxes) and after reclassification as emerging market next June, its index (KSE-100) may touch 55,000 mark, a brokerage executive told media on Friday.
The foreign inflows forecast for next year is in line with Seeking Alpha’s. “It will lead to an estimated inflow of around USD 500 million from passive emerging market funds into the bourse which is trading at an estimated forward P/E of just 9.7x”.
On Friday, KSE-100 index closed at 46584.53 — a new high and compared to 32,812 points a year back (December 31, 2015), it’s a whopping 38 percent climb up.
“After reclassification of PSX into the MSCI (Morgan Stanley Capital International) Emerging Market Index in May 2017, net foreign inflow would surge significantly,” Shahid Ali Habib, chief executive officer at Arif Habib Limited said.
“After the reclassification, double digit growth in corporate earnings, attractive valuations, foreign investment in the bourse and Chinese investment in energy and infrastructure, the KSE-100 index can go between 53,000 to 55,000 points in 2017,” Habib told media.
Several market observers and analysts in background interviews with BE2C2 agreed with the general statement (with a caveat) that KSE-100 could hit 55,000 sometime in the later half of 2017. With MSCI reclassification as emerging market, PSX shares will however be affected by factors such as US interest rates and US market, and may see adjustments initially.
In 2016, Pakistan saw a net outflow of around $250 million in foreign portfolio investments as the MSCI Frontier Markets (FM) Index funds were offloading their portfolios after the reclassification announcement.
The term “frontier markets” refers to a collection of countries that are at an earlier stage of political and economic development than emerging market countries.
More offloading by foreign investors who were investing in Pakistan stocks as “frontier market” could be expected in the next 8 to 10 months, some stock brokers and observers told BE2C2.
They are expected to return after Pakistan’s reclassification, they said. At present, foreigners are holding shares worth $6.5-7 billion at the PSX.
On Friday, the PSX issued statement announcing that it will open bids for its 40 percent stake selloff on December 22.
In July, the newly integrated PSX unveiled plan to sell 40 percent of its shares to strategic investors and another 20 percent as free-float through an initial public offering.
Currently, more than 300 Pakistani brokers own the PSX.
Analysts say the PSX is expected to fetch around $136 million to $183 million through the sale of divesting its majority 60 percent stakes.
Zeeshan Afzal, executive director research at Insight Securities said the estimated sale value was based on an expected transaction price of 3 times the book value compared to global average of 3.8x.
He said at the price to book ratio of 4x, “$183 million would fall in brokers’ kitty.” “However, if all brokers agree to offer the remaining 40 percent shares, the cash inflow would increase to $227 million (at P/Bv of 3.0x) and $305 million (at P/Bv of 4.0x),” he added.
At least 17 entities have expressed interest in holding shares of the PSX, whose benchmark KSE 100-share Index has been one of the world’s best performing indices this year. It gained 38 percent. Chinese and British investors are among the interested buyers.
PSX sources told media a consortium, consisting of the Shanghai Stock Exchange, Shenzen Stock Exchange and a Chinese fund as well as another group of UK financial institutions, led by NASDAQ Technology, are potential buyers.
In the last three years, the PSX’s benchmark Index surged more than 90 percent.
At present, the PSX is almost a cash market, offering very limited future contracts and no options. With MSCI reclassification and induction of strategic investors,PSX operations will improve and help in introduction of futures/derivatives products. This will also boost trading activities and further improve the confidence of foreign investors.