Rebalancing to see weightage tilted towards auto sector

The next rebalancing of KSE-30 index would take place with effect from March 15, 2022. While there are no sizeable publicly declared tracker funds of the price return based KSE-30 index, the total return variant of the KSE-30 is used as a benchmark by a number of financial institutions and select mutual funds.

As per the details announced by the Pakistan Stock Exchange (PSX), the stocks that would exit the index are International Industries (INIL), International Steel (ISL), Pioneer Cement (PIOC) and Pakistan Refinery Limited (PRL). These will be replaced by Millat Tractors Limited (MTL), Cnergyico Limited (CNERGY), Netsol Technologies (Netsol) and Ghani Global Holdings Limited (GGL).

As per the current prices and proforma calculations, the four outgoing stocks, having weightage of 2.38 per cent, will be replaced by incoming stocks commanding weight of 4 per cent. In terms of sectors, the rebalancing will see the weightage incrementally swing away from the construction sector towards the auto sector.

At present, the KSE-30 has zero weight to auto sector, which will likely to increase to 2.78 per cent by the single contribution of MTL. The other material change this time is the complete exit of the engineering sector (steel), as the only two stocks from the sector (INIL and ISL) have lost their ranks from the index.

Moreover, with the addition of Netsol and exit of PIOC, the technology sector may rank as the fourth largest sector in the KSE-30 index, beating the cement sector by one rank.

Given the incoming stocks weigh more than the exiting stocks, the current weights of the sectors that observe no change would also register a decline in their respective weights. Post-re-balancing, the total market capitalisation (based on free float) of the KSE-30 index on current prices would slightly increase 2 per cent.

The banks do not disclose their internally-used benchmarks, but taking assets under management (AUMs) of funds using KSE-30 TR as benchmark and equity portfolio of banks as a proxy, rebalancing impacts Rs170 billion to Rs175 billion worth of portfolio investments.

Given none of these are tracker funds they are not mandated to alter their allocations to the new weights; hence, it would be difficult to estimate flows following the rebalancing event, but biggest adjustment could be seen in MTL. For illustration purposes, we have presented indicative activity that would take place for every Rs10 billion of portfolio investment, mirroring the changes in KSE-30.

Soorani is the lead analyst for the banking sector, consumer and insurance sector preparing financial models and performing valuations with total coverage of 14 companies, along with regular management conference calls, meetings and briefing. She also regularly contributes in various research publications.