FRANKLIN Resources Inc., an American holding company, is the largest single foreign institutional investor in Pakistan with an equity portfolio of $973m.

The amount equals the cumulative stake of the next three biggest foreign investors in the country’s stock market: International General Insurance ($438m), Lazard Limited ($336m) and Schroder Investment ($159m).

Many market participants affirm that the influence of foreign investors in the local capital markets is growing. The market capitalisation of the Karachi Stock Exchange is at its peak at $77bn. Of this, the ‘free float’ is believed to be about $21bn, and 34pc of that is reportedly owned by overseas investors.


Now is a great time to implement reforms which will put electric power supply on a sound financial footing, enabling adequate supply at a reasonable price for local businesses that need to be internationally competitive — Dr Mark Mobius


This sometimes gives foreign institutional investors the power to set the direction of the market. One evidence of that came in mid-March, when the KSE-100 index tanked by 800 points in a single day after US-based hedge fund Everest Capital, with an exposure of no more than $100m in Pakistani equities, began to pull back from the market.

“Often the psychological impact of a foreign portfolio sale is greater than the actual amount of dollar outflow,” affirmed a senior broker.

Franklin Resources Inc, along with its subsidiaries, is referred to as Franklin Templeton Investments. At the firm since 1987, Dr Mark Mobius (born in August 1936) is the executive chairman of the Templeton Emerging Markets Group, and is well known across the world as an investment guru.

He enjoys strong leverage in key segments of many emerging markets, including Pakistan.

Templeton has sizable stakes in many KSE heavyweight stocks like OGDC, MCB Bank, United Bank and Pakistan Petroleum. A man of few words, when he speaks, everybody always lends him their ears.

Last week, after requested by Dawn, Dr Mobius agreed to share his views on Pakistan’s economy, the performance and the trend of the local stock market, and foreign investors’ outlook on the country. Here is what he said.

Equity markets: The Pakistani market has been one of the top performing emerging and frontier markets in the last five years (ending June). The MSCI Pakistan Index has more than doubled with a 129pc return, compared to a 45pc return for the MSCI Frontier Index and a 22pc increase in the MSCI Emerging Markets Index in dollar terms.

Despite that strong performance, the valuations of Pakistani stocks still remain relatively attractive. As of end-June, the trailing price to earnings ratio (P/E) of the MSCI Pakistan Index was 10 times, versus 11 times for the MSCI Frontier Index and 14 times for the MSCI Emerging Markets Index.

Economy: The country’s macroeconomic environment has also been improving in recent years. GDP growth is estimated to have accelerated to 5.5pc year-over-year in the fiscal year ending June, from 1.6pc in FY10. The fiscal situation has also been improving, supported by multilateral disbursements in recent years as well as a recent international Sukuk issue.

The domestic economy has also been supported by easing inflation, which allowed the central bank to cut its benchmark interest rate to its lowest level in 42 years. More recently, lower oil prices have also improved the country’s trade balance, although exports have been impacted by lower cotton prices and a stronger rupee.

Elsewhere, the government’s efforts on expenditure control and divestment have been positive.

But the government needs to remain committed to the economic and structural reform programme.

Foreign investors’ perception: For foreign investors such as us, the most important concerns currently remain security as well as political stability. While the steps targeting terrorism internally after the Peshawar incident are positive, these efforts need to be maintained over the longer term to develop a better security climate for businesses and the society as a whole.

On the political environment, delays in the implementation of reforms or deterioration in the political or security situation could adversely impact the country’s macroeconomic development, hinder investment, impact the fiscal position and weaken investors’ confidence.

From a business perspective, the energy situation is another area of concern. Energy-sector reforms need to be accelerated, including capital investments in every aspect of electric power: generation, distribution and transmission. Electricity tariff revisions and reduced electricity subsidies are positive. Of course these reforms can be more easily implemented now that the prices of oil and gas are on the slide.

Now is a great time to implement reforms which will put electric power supply on a sound financial footing, enabling adequate supply at a reasonable price for local businesses that need to be internationally competitive.

Future outlook: President Xi Jinping’s recent visit to Pakistan where he pledged to invest $46bn in the areas of trade, energy and infrastructure, as well as establishing the China-Pakistan Economic Corridor, signifies the country’s importance in the region and should help the country attract additional investment.

This offer should be embraced by Pakistan since it will help to strengthen the country’s macroeconomic performance and fiscal position. The future is bright for Pakistan.

Published in Dawn, Economic & Business, July 27th, 2015

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