KSE-100 index at 30: Profits grow half of its age

Hassan NaqviReporter

02nd Aug, 2021. 05:54 pm
KSE 100 index by 3.3%

LAHORE: The Pakistan Stock Exchange’s (PSX) most followed benchmark KSE-100 index is celebrating its 30 years of existence. The KSE-100 index is a total return market capitalisation-based index, which was created in 1991 with a base value of 1,000 points.

Umair Naseer, associate director research at Topline Securities, said that following international best practices, the benchmark index calculation methodology was changed from the full market capitalisation to free-float market capitalisation in October 2012.

“Though many other indices have been created since 1991 like the KSE-30, All Share, KMI-30, etc., the KSE-100 index still remains the most followed and most reported indicator of stock price movements in Pakistan,” he said.

The index comprises 100 companies selected on the basis of the sector representation and highest free-float capitalisation. The index captures 70 to 80 of the total free-float capitalisation of the companies listed on the exchange.

One company with the largest market capitalisation from each of the 36 sectors is selected from all the listed sectors (except open-end mutual funds). The remaining 65 companies are selected with the largest market capitalisation in descending order.

The KSE-100 index is a total return index that is adjusted for dividend, bonus and rights.

Thirty years findings and analysis

Naseer said that the Compounded Annual Growth Rate (CAGR) of the KSE-100 Index was at 14 per cent during the last 30 years. It means that if you had invested Rs1,000 in 1991 at the bourse, it would have increased close to Rs47,000 by FY21, a gain of around 47 times.

“So, your investment would have grown at a 14 per cent each year in the last 30 years, assuming that your portfolio had mirrored the benchmark KSE-100 index,” he said.

The research director also said based on another methodology, the average market return in the last 30 years for the KSE-100 index stood at 19 per cent. This is based on the calculation that all shares are sold at the year-end and re-bought at the start of each year.

Similarly, a $1,000 investment in the KSE-100 index would have increased by over seven times since 1991 to reach $7,273, even if we consider currency depreciation.

Naseer recalled that the decade of 1990s was not good for the investors, as the KSE 100 index generated a CAGR of only 3 per cent. In the following 10 years, the gain was far superior at 25 per cent. The return during the last decade (2011/21), was in line with the 30-year return of 14 per cent.

He said the day traders market has not been very attractive, considering that only 54 per cent of the trading sessions closed positively, while 46 per cent of the days recorded a decline.

“Similarly, our monthly analysis suggests that 58 per cent of the month’s index closing was in the positive zone, whereas 42 per cent of the times it remained in negative,” he said.

On a yearly basis, the index performance remained very good. Of the 30 years, 21 times the index gained, which is 70 per cent, whereas nine times it closed in the red territory, which makes it 30 per cent.

Interestingly, no single six years rolling returns were without any gains, meaning that since 1991, if you had invested the money for a minimum of six years, you would have never lost money, Naseer added.

The longest period of non-stop annual gains was from FY10 to FY17 when the index gained 550 per cent in eight years. The longest time of bearish spell was seen in FY18 to FY19 when the index came down 27 per cent in two years.

“[The] best year for the KSE-100 index was FY03 when the market returned 92 per cent, whereas FY98 was the worst year when the index declined 44 per cent,” he said.

He said Pakistan’s economic growth has also been one of the key driving forces behind the market performance. In the last 30 years, Pakistan’s GDP growth has averaged at 4.2 per cent.

“During the last 30 years, we have seen the market performance taking a hit during the periods of low economic growth,” he added.

The periods, including FY97 and FY98, FY2008 and FY2009, and FY19 witnessed a decline in the benchmark KSE-100 index, as the GDP growth fell below 4 per cent during the period.

Other factors, including interest rates, stock market reforms, currency movement, and liquidity have also played their part in the overall market performance.

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