Capital outflow from equity market

Published October 27, 2014
Illustration by Abro
Illustration by Abro

PAKISTANI equity investors were spooked by foreign investors’ sale of $26.72m worth of stocks in 10 consecutive sessions, which came to a halt only on last Thursday.

The overwhelming concern of local investors was that foreigners would stampede out of the market with a flurry of sell orders. This apparently did not happen.

Yet, several senior stock strategists suspected that the recent outflow had less to do with big fund managers from places like the US and more with speculative money flowing out to the Gulf region.

“Fund managers in the US and developed markets are long-term investors, unlike speculators in Dubai,” argued one local fund manager. Scrutiny of data released by the State Bank of Pakistan from October 1-23 shows net sale by ‘overseas Pakistanis’ to the tune of $20m, while ‘foreign corporates’ were noted to have recorded an inflow of $9m.


Some stock strategists attribute the recent outflows mainly to speculators in the Gulf, while others say foreign hedge funds are gathering their funds closer to home in anticipation of interest rate hikes in the US


“Essentially, investors from the Gulf region are classified as ‘overseas Pakistanis’ and investors from developed markets as ‘foreign corporates’,” a senior broker asserted.

It still surprises some people that portfolio investors in the Gulf are pulling back their investment from the Pakistani stock market. Zulqarnain Khan, MD of Next Securities, said shifting funds from Pakistan to the United Arab Emirates (UAE), particularly Dubai, is relatively easier. He agreed that the recent boom in the property market in Dubai had attracted large funds from Pakistan.

“It is the rule of thumb that funds flow where the return on investment is higher,” he said, and added that foreign investors may have been disheartened by the stringent rules recently enacted by the Federal Board of Revenue. They may be pulling out their portfolio investment from the country not just to buy property but also to invest in high-yielding securities abroad.

The opportunities of investment in the region are growing. “Two months ago, Abu Dhabi removed the cap on rent, raising rental yields and giving fillip to properties there,” he said. This came on top of the removal of the ban by the Saudi government on foreign investors owning property in the kingdom.

Yet, Zubair Ghulam Hussain, head of equity sales at Foundation Securities, said that in anticipation of the interest rate hike in the US, foreign hedge funds were withdrawing their investment from regional and frontier markets to keep the funds close at home in secure interest-bearing securities.

A broker concurred, saying foreign fund managers from developed markets would only switch their funds abroad to take advantage of higher returns and would hardly dash for the exit door out of fear of political or economic upheaval. “When they enter ‘frontier’ markets such as ours, they know the risks,” said this broker.

Investors generally wonder if foreign investment in the Pakistani equity market has grown to dictate the direction of the market.

“Portfolio investment by foreigners in the equity market is believed to be around 30pc of the free float,” says Zubair. He calculated foreign investment in the market at $5.5bn, given the current capitalisation of $68bn, of which 27pc or $18bn is believed to be free float and 30pc of that to be held by outsiders.

How important is foreign portfolio investment for a country? Khalid Mirza, former chairman of the Securities and Exchange Corporation of Pakistan and currently a professor at Lums, replied that “generally, it maintains the currency’s value and keeps the cost of capital low”. Although fickle in nature, it does have sentimental value for the stock market, he said.

A senior financial analyst says foreign inflows may have slowed down on account of the ongoing political situation, in addition to the IMF’s conditions for releasing the loan installments to issuance of Sukuk and divestment of OGDC shares.

“One major factor that has badly battered the oil and gas stocks is that Brent crude is no longer on the boil. The Arab Light crude has sunk 25pc to Rs83.06 a barrel, from Rs111.41 a barrel at the start of 2014.”

Yet many stock brokers did not believe that the foreigners were disenchanted by the Pakistani equity market. “Since the top-tier blue-chip stocks have reached their fair values, foreigners may be squaring their positions,” said one. Following a cumulative 100pc return over the past two years, the Karachi stock market has scarcely disappointed investors in 2014.

“The KSE-100 index’s year-to-date yield is 18.3pc, and it has outperformed the MSCI Frontier Market Index’s yield of 12.28pc,” pointed out one stock strategist.

A regional comparison by AKD Securities reveals that Pakistan equities are currently trading at a price-to-earnings (P/E) multiple of 8.17 times forward earnings, and earnings growth recorded at 13pc.

This is highly attractive against most regional markets like Mumbai, which is trading at P/E ratio of 14.08 times; Indonesia at 13.37; Malaysia at 13.80; Philippines at 14.94 and Vietnam at 16.97. In addition to this, the Pakistani market’s return on equity — at 21.38pc — and dividend yield — at 5.29pc — is the highest among regional peers.

Published in Dawn, Economic & Business, October 27th, 2014

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