From its all-time high at 36,229 points on Aug 6, 2015, the KSE-100 index had tumbled to 31,298 points by the end of trading session last Friday. It represented a steep drop of 4,931 points or 13.6pc in just the last six months.

If the entire market were to have sunk that much, it would be nothing short of a catastrophe. But the KSE index of 100 shares that most investors follow on the Pakistan Stock Exchange (PSX) is skewed towards the sectors that hold the highest weightage. According to the PSX website, the KSE-100 index was introduced in November 1991 with base value of 1,000 points. The index comprises 100 companies out of all listed companies currently at 559.

“Those 100 are selected on the basis of sector representation and highest market capitalisation, which tracks over 85pc of the market capitalisation of the companies listed on the Exchange.” The two sectors that currently command the highest weightage in the index include commercial banks with 25pc weight and oil and gas exploration companies having 10pc weight. Together, they represent 35pc of the KSE-100 index. And incidentally both those sectors have come to grief.

“Foreign selling is not Pakistan-specific”, says Mr Nasim Beg, vice-chairman MCB-Arif Habib Savings

A barrel of oil that sold for $115 in the international market in June 2014 has sunk to $29. The phenomenon that few thought was possible a couple of years ago have sent the shares of oil and gas exploration companies reeling down. Such is the case with the other heavyweight sector: banks.While the spreads have shrunk, the flow of revenue from non-core activity — investment in Pakistan Investment Bonds (PIBs) — is about to dry up.

Those two factors would inevitably make a dent in the profitability of the two major sectors and investors are rushing out, causing downward price spiral in their stocks which ,in turn, has a profound sentimental impact over the entire market.

Mr Nadeem Naqvi, the managing director of PSX told Dawn: “The fall in the index can be accounted for mostly by the sharp reduction in the price of energy sector stocks as well as to a lesser extent the banking sector stocks as both those sectors make up a significant component of the index.” Mr Naqvi explains that those blue chip heavyweights came under selling pressure mainly due to sale by foreign portfolio investors as part of their global equity sell-off in the emerging and frontier markets.

“That does not mean that other sectors have also been sold off that much. For example cement sector has held up well along with the auto sector due to their strong fundamentals”, the PSX MD argues.

But the trouble is that the sectors that are doing fine have relatively small weightage in the index and are not able to neutralise the bigger fall. Roughly, cements have around 12pc weightage; automobile 3pc and pharmaceuticals just 2pc in the index. Persistent selling by foreign portfolio investors has been blamed for the stock market decline. In 2015, FPI outflow amounted to $315m while in the first month of 2016 to-date the overseas investors have ditched stocks worth $46m.

“The foreign selling is not Pakistan-specific”, says Mr Nasim Beg, vice-chairman MCB-Arif Habib Savings. He asserts that the global sell-off by sovereign funds is a liquidity driven issue and not particularly based on economics. In regard to the local market, Mr Beg observed that except for those two sectors and some slow down in textiles, most sectors were expected to show good earnings.

A senior analyst concurred with that view and added that among the 30-odd sectors listed on the PSX, only around eight accounted for 80pc of market activity. Those included banks, oil and gas exploration, fertilizers, cements, textiles, automobiles, food and pharmaceuticals. It meant the index could sink or swim based on the performance of those sectors which could be counted on the finger tips.

But does the foreign investor set the direction of the market and the index? A senior stock broker said the overseas investors held sway for two reasons. Firstly, the foreigners’ share in the market free-float has scaled up from just 18pc in 2008 to 34pc at the moment. And second, an overwhelming share of the foreigners’ funds went into the heavyweight stocks in oil and gas exploration.

The slow but steady exit from the sector meant casting a heavy blow to the KSE-100 index. An equity strategist calculated the foreign investment in Pakistani equities at around Rs650bn which makes up 9.8pc of the current market capitalisation at Rs6.63trn. He, however, argued that investor need not worry over the foreign sell-off worth $350m since 2015, given that in the three years preceding 2015, foreigners had entered the market in droves pumping in more than $900m in Pakistan equities.

In June 2005, the Karachi Stock Exchange introduced another benchmark index called KSE-30 index, which is calculated using the free-float capitalisation methodology. It was supposed to over-shadow the KSE-100 index, but nothing of the sort happened and the investors continued to track the familiar 100-share index.

But market strategists acknowledge that the index in vogue (KSE-100) goes through a constant change. An official at the bourse said the weightage of the stocks and sectors keep changing and the bourse has to keep up with the new numbers.

Published in Dawn, Business & Finance weekly, February 1st, 2016