KARACHI, Sept 2: Now that the KSE-30 index was born on Friday, most market participants hope that it will grow up to overshadow the KSE-100 index. But cynics think otherwise.
Based on market capitalization, the lopsidedness of the KSE index of 100 shares was all too obvious. Companies with very small float such as Oil and Gas Development Company carried the heaviest weightage in the index. A rupee one movement in the price of OGDC stock could shake the KSE-100 index by 20 points either way. Three or four major scrips marching together in the same direction -- out of the total 652 listed companies -- could set the trend of the market.
Everyone, including the corporate monitors, knew all along that the KSE-100 index misrepresented the market, so what took it so long to introduce the ‘market float based’ index? It looks like Pakistan’s bull market, which has seen 60 per cent average yearly growth in the last five years, would not have looked so impressive if it were not for the KSE-100 index composition.
When the index consistently moved northwards, it suited the government to display to the world the mercury rising in the barometer of the economy as a proxy to prove its impressive growth; it suited the corporate monitors for they could point to the successful implementation of market reforms; and it suited the broker community for the rising index attracted more and more clients.
The new KSE-30 index is more representative of the market. Syed Shahnawaz Nadir Shah, head of research at Noman Abid and Company, explains salient features of the new index. “The main factors of this index that make it different from the other indices are: (i) Market capitalisation is based only on the ‘free-float’ of shares, rather than on the basis of paid-up capital. Due to this reason the ‘over-representation’ of the oil and gas exploration stocks would reduce in the new index; and (ii) the other indices represent ‘total returns’ of the market. That is, when a company announces a dividend, the index is not reduced/adjusted for that amount of dividend (whether cash or bonus).
Thus if the present KSE-100 stands at a 10,000 level and remains there for a year, it would actually show that in real terms the values have declined. Simply put, the KSE-100 and KSE All-Shares indices are not ‘dividend adjusted’. On the other hand, in the KSE-30 index, the index is adjusted for dividends and right shares.The analyst has written a detailed report on the index. Concurrently, an independent group introduced ‘investment-based’ Dow Jones-JS Islamic Index, which is the first of its kind in the country.
The question that boggles every mind is: Will investors realize the benefit of KSE-30 index and accept it as a benchmark for stock trading in place of the KSE-100 index? “Never mind the worth of it,” says a leading asset manager. “It would be very difficult to wean investors to the new index.” In order to prove his point, the stock picking guru points to the other index that sits on the KSE: The KSE All-Shares index. “How many people ever even cast a cursory glance at that index,” he asks and points to at least half a dozen other stock indices introduced by private parties, none of which have been able to divert general investors’ attention from the KSE-100 index.
It is difficult to loosen the gripping power of the long held index. Indian stock markets have been introduced no less than 15 indices, yet the BSE-100 retains the popularity. Japan has just two -- Nikkei 225 and the less known Topix. The Malaysian market trades on just one: KLCI (KLSE Composite Index). Almost eight indices gauge the UK market, but the FTSE 100 index is the one that enjoys the popular following; CAC 40 does that on the French bourse and DAX on the German market.
The world’s largest New York Stock Exchange boasts of the largest number of indices, which happen to be 52, not including some industry specific indices. But only a couple of them catch investors’ interest: Dow Jones Industrial Average; Dow Jones Composite Average and NASDAQ.
Some of the market analysts thought it wise to wait before commenting on the efficacy of the new KSE-30 index. But a few bold ones suggested that there was just one index that had to be the apple of investors’ eyes. The KSE-30 index may find favour with foreign investors and analysts, but the public is likely to look up to the KSE-100 index, for the time being at least.
It is, therefore, difficult to say if it can be considered a well-thought out idea to let the three indices -- KSE All-Shares; KSE-100 and KSE-30 -- run parallel. Confusion in the minds of investors would have to be taken as a side-effect. At the end of trading on the first day of its launch on September 1, the KSE-30 index was shown to have gained 175 points, up from 12,516 to 12,691 points. On the other hand, the older KSE-100 index reflected a gain of 107 points, up from 10,064 to 10,171 points.`
