The foreign portfolio investment has been steadily declining over the last many years.

Since the beginning of 2020, overseas investors have sold off Pakistani stocks worth a massive $446 million (Rs71.4bn at Rs160 a dollar). Local participants have been net buyers with the highest pick by insurance companies ($203m) and individuals ($183m).

A market strategist said that Pakistan is off the foreigners’ radar due to its minuscule weight in the MSCI Emerging Market Index. The country was better off in the MSCI Frontier Market Index with a much higher weight of eight per cent.

Global investment guru Dr Joseph Mark Mobius — executive chairman of Templeton Emerging Markets that was at the time the biggest foreign investor in the Pakistani capital market — made a shocking statement in 2018. He claimed that Templeton would continue treating Pakistan as a frontier market as it was not ready to become an emerging market. His statement did earn the ire of local market participants at the time, but foreign investors seemed to agree with him. No major foreign fund allocations have followed, leading the market to bleed from incessant foreign selling.

The view unwittingly shifts to the exponential growth of the neighbouring Indian markets. Available figures suggest that foreign institutional investors (FIIs) have bought 41,210 crores Indian rupees’ worth of stocks this month (November), which is on track to be the highest-ever monthly foreign purchases in equities over the last three years. The previous highest monthly FII inflows were seen in March 2017 at IR33,781 crores.

‘Pakistan is off the radar of foreign equity investors due to its minuscule weight in the MSCI Emerging Market Index. We were better off in the MSCI Frontier Market Index with a much higher weight of 8pc’

A market watcher for a major brokerage house in Pakistan that caters to quite a few big overseas investors said that with available less risky markets, foreigners would want to avoid both political and economic uncertainties that plague the country.

He said that flashing the current account surplus was not in itself adequate. Foreign investors also expect a corporate growth rate of 8-10pc and ample returns on investment. He provided the figures for returns on equities in Sensex in the Bombay stock market. Consider the 10-year simple return in percentage of a few companies: Aventi Feeds 25,168pc, Caplin Point Laboratories 22,606pc, West Life Development 11,486pc, Bajaj Finance 4,366pc and Balaji Amines 1,688pc. Among the top 95 companies, Apollo Pipes gives out the least return of 1,007pc.

There are no available figures for 10-year corporate returns of the listed companies in Pakistan. An equity strategist, therefore, made a wild guess that only a few blue-chip companies could have provided a return of over 1,000pc, including the capital gains, dividends and bonuses. But for most investors and sponsors, such high returns would be no less than fairy tales. Before the 2017 debacle, the average yearly return on Pakistan equities was 25pc. The next three years have been blank.

Securities and Exchange Commission of Pakistan (SECP) Policy Board Member Khalid Mirza said a local or foreign investor wanting to set up an enterprise looks to raise capital as well as an assurance of divestment at will. He acknowledged that the equity markets in India were huge and vibrant. The Indian market, he said, had developed largely because of competition at all levels: the issuers, issues, intermediaries, trading platforms, alternative trading systems and at least three huge markets competing with each other on the Dalal Street — Bombay Stock Exchange, National Stock Exchange and Calcutta Stock Exchange. There are half a dozen other official operating markets.

Against that, the entire structure of the stock market here is monopolistic and lacks competition at all levels, he added. Mr Mirza said capital markets grow on account of supply of equities, and not demand. The major limitation for the potential investor is the difficulty in mobilising funds, inability to divest and onerous regulations. He said the development of investment banking was essential for growth of capital markets. He lamented that the recently released Asian Development Bank (ADB) report on capital market development had ignored those two important issues of investment banking and competition.

A market watcher calculated that at the moment, foreign portfolio investors held around $4.5bn worth of Pakistan equities. That was without counting the strategic holdings. In 2013, the foreigners’ equity stake was around $7.8bn. Since the unbridled overseas investors sell-off is the major cause of the market meltdown, investors wonder if there would ever be a plug on the outflow.

A London-based fund manager who also works for a local brokerage talking about the Pakistan stock market quoted the French writer Jean-Baptiste Alphonse Karr: “The more things change, the more they remain the same.”

He worked for years in Pakistan before shifting overseas. He was bitter about the lack of growth of the local market over decades. “In the Pakistani market, we have the same 10-15 companies, a few bank, cement and oil stocks, which continue to be chased by too much money.” If somebody ventured into the world and returned after 20 years, he might find new Companies Acts, lots of changes in laws and regulations that have been laboriously drafted, but not much change in practice, he said.

“The same old seths, same major market players, same financial institutions and same top companies would stare him in the face.” He said foreigners used to purchase oil and bank stocks, but worldwide they are parting ways as they no longer want to be involved in fossil fuel. They are reaching out towards sustainable fuel and Pakistan doesn’t even have a framework ready yet. “It could be a very long discussion, but the bottom-line is that the gora doesn’t find our story fascinating anymore,” he concluded.

Published in Dawn, The Business and Finance Weekly, November 23rd, 2020