Pakistan sees record fall after stock upgrade

Last week was meant to be Pakistan's moment in the sun.

On 1 June it was upgraded from the MSCI Frontier Markets Index and moved into the MSCI Emerging Markets Index, which was a "huge boost to its ego" as one analyst told me and a "reputational boost" for the whole country.

In the lead-up to the inclusion, investors poured into Pakistan. At one point in May, Pakistani shares hit a record high.

But on the day itself, shares fell by a record too. Over the course of last week, the Pakistani stock exchange dropped by almost 8%.

So what's going on?

It is important to note that shares go up and shares go down. And often people sell because other people are selling. That's the nature of investing in the stock market.

And by any account, the Pakistani stock market is a volatile one as I previously said.

There were, however, some other important reasons why shares fell as much as they did.

Firstly, Pakistan was upgraded from the Frontier Markets Index to get into the Emerging Markets Index.

In order for this to happen, it had to exit the Frontier Markets Index, and all funds that own shares in that index also have to exit. They don't necessarily have to buy straight back into the Emerging Markets Index either.

Foreign funds were the main ones selling out of Pakistan according to analysts, and were one of the key reasons why shares fell by as much as they did.

Some $500m worth of shares were sold last Wednesday, the day before the MSCI inclusion, in comparison to $450m of foreign funds coming into the country to buy shares.

Profit-taking was also a factor. In the lead-up to the MSCI inclusion, foreign and domestic investors had been showing more enthusiasm for Pakistan shares. But then some sold at a premium, making a tidy profit.

And finally, uncertainty surrounds the new Pakistan budget and what that means for domestic investors. The prospect of higher tax rates on dividends doled out by corporates and mutual funds has perhaps dampened enthusiasm.

Still, Pakistan was Asia's best-performing market in 2016 and one of the best regional growth stories. The government will need to ensure that the country's moment in the sun doesn't fade even before it began.