Foreign selling causes market jitters

Published March 9, 2020
Foreign investors are fleeing the stock market in droves. — AFP/File
Foreign investors are fleeing the stock market in droves. — AFP/File

Foreign investors are fleeing the stock market in droves.

According to the National Clearing Company of Pakistan (NCCPL), net foreign outflows last week were $21 million. Foreigners dumped local equities worth a startling sum of $65m in just one month. It puts in the shade a comment made by the Ministry of Finance a little while ago: “Foreign portfolio investment in the stock market during the first six months of the current fiscal year has also stood at $18.8m after four years of heavy selling by foreign investors.”

Market strategists calculate that foreign portfolio investors hold around $4.7 billion in Pakistani equities at the moment. The figure does not include strategic holdings. It accounts for just 20 per cent of the free-floating market capitalisation and represents a dip from $7.5bn of foreigners’ equity investments in 2013.

But many stock strategists argue that the foreign equity sell-off is not Pakistan-specific. “Fund managers are under pressure owing to a weak global growth outlook as the scare and repercussion of coronavirus take their toll. It has triggered a sell-off in equities in both emerging and frontier markets because asset managers run to seek the safety of safe havens,” says Atif Zafar, chief economist and director of research at Topline Securities.

‘Foreigners who bought shares in the August-December rally can now be booking profits’

He says Pakistan is also out of the foreigners’ radar owing to the minuscule weight in the MSCI emerging market index. The country was better off in the frontier market index with a much higher weight of 8pc.

A veteran stockbroker mused that after years of cajoling and pleading with the MSCI, Pakistan celebrated its return to the emerging market from the frontier market. However, it turned out to be an unmitigated disaster. Local investors did anticipatory buying while waiting for massive purchases from active funds. They were horrified to witness an outflow. The resultant market crisis saw stock prices go into free fall. The benchmark KSE-100 index lost over a quarter of its points from the peak of 53,124 in May 2017, just before the announcement of the country’s unfortunate upgrade.

Investors who were accustomed to receiving an average return of 25pc a year on equity investments saw negative returns in the last three years. The Pakistan Stock Exchange (PSX) website reveals a return into the red of 1pc over a year and 3.32pc calendar year to date.

The same equity strategists who were yearning for an entry into the emerging market are now hoping and praying for a downgrade: three of the six stocks that originally made their way into the MSCI emerging market index have been removed. The erosion in market capitalisation and shrinking volumes can provide a reason for such reconsideration by the MSCI. Currently, rating agencies Standard & Poor’s, Moody’s and Fitch place Pakistan in the highly speculative category in their investment bond rating.

A former chief regulator of the capital markets asserts that the market is 10pc economics and 90pc psychology. He says investor confidence grows when price discovery is right. Foreign investors enter markets that have no hang-ups, he says. The regulators should promote the market through the enforcement of a good regulatory framework, he adds.

The portfolio manager of an investment house operating out of London blames the economic malaise for the ruined foreign investor confidence. He said he met in February about 20 fund managers who operate in the region. He found them disinterested in allocating funds to the Pakistani equity market.

Affirming that uncertainty is worse than bad news, they discounted the good news of a new government in place but expressed concerns about the absence of a long-term economic plan.

Some analysts complain about the low level of liquidity in the market. Zulqarnain Khan, executive director at Next Capital, observes the foreigners who bought equity in the rally between August and December last year can now be booking profits. He listed key issues that can drive out foreigners from the market: the geo-political situation, generally unimpressive quarterly corporate results, system constraints that include an unstable economy, and a hike in the cost of doing business. “The transit cost of raw material has gone up after the cessation of trade with India,” he says.

Market strategists believe foreigners’ discomfort may also be because of the announcement by the government regarding the privatisation of parts of OGDC and PPL without specifying the date and price. It prompted them to offload those heavyweight scrips lest they be caught holding high-value major energy stocks.

There are lurking dangers in equity investments as the foreign inflow in treasury bills fell by $175m last week after a consistent rise to over $3bn. A market veteran suggested that foreign funds might be in a forced-selling mode to meet a run on redemptions for which they could be offloading equities.

A daily net outflow of foreign portfolio investment is indeed a cause for concern. Investors wonder if the situation will get worse before getting better. Over the last one year, insurance companies have come to the rescue of the market. The mammoth foreign selling in the past month was fully absorbed by insurance companies, which picked up stocks worth $51m.

As the other big buyer, banks lagged far behind with a fresh investment of $8.92m only. How long can local participants, mainly insurance companies, keep mopping up shares sold by foreign investors? Most market men could only express hope that local companies would keep plugging the drain until 2021-22 when a shift to economic growth would hopefully reverse the flow of foreign funds.

Published in Dawn, The Business and Finance Weekly, March 9th, 2020

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