KARACHI, May 19: Portfolio investment saw a net withdrawal of $85.8 million in April this year as most foreign investors booked profits in the booming stock market. This huge withdrawal in a single month had a depressing impact on total portfolio investment that fell to minus $131.3 million in ten months to April 2004.

It also lowered the volume of total foreign investment into Pakistan to $629.1 million in July-April 2003-04, despite the fact that foreign direct investment or FDI rose to $760.4 million during this period from $696 million in a year-ago period.

The FDI went up primarily due to privatization of Habib Bank Ltd. The portfolio investment and the FDI put together show the total foreign private investment. The latest data released by the State Bank shows withdrawal of $40 million and $58.7 million portfolio investment, respectively, by the UK and the UAE investors in April 2004.

Stock brokers link this to profit-taking by the investors of these countries meaning that as the share prices boomed in April the investors sold the shares they held to earn profits. "The market was at a peak in April. Foreign investors booked profits by offloading their holdings," said Karachi Stock Exchange Chairman Arif Habib.

The KSE 100-share index soared to an all-time high of 5,620 on April 19 before it closed at 5,430 at the month-end, up from 5,107 at the end of March. Turnover of shares almost doubled during this month from 7.698 billion to 15.459 billion and aggregate market capitalization rose from Rs1,346 billion to Rs1,436 billion.

This booming trend prompted foreign investors to offload their holdings in Pakistani bourses. But what else solidified their decision to do so was that interest rates started inching up in the international market, opening up more avenues of investment for them.

Besides, the dollar also remained firm in global markets. The rupee came slipped slightly several times during April on higher demand for the dollar in the inter-bank market for financing of trade deficit and for repayment of external loans of the government and the private sector.

"This interest rate factor and exchange rate factor also played a role in encouraging foreign investors to pull out from our stock market," Mr Habib told Dawn. Six-month LIBOR or London inter-bank offered rate that responds quickly to changes in the interest rates structure of major economies moved up 18 basis points in April from 1.16 per cent to 1.34 per cent.

He said the portfolio investment from the UK did see a fall in April also because the International Power plc. divested 4.1 per cent shares of Hub Power Company to generate $30m cash. The UK-based company reduced its share holding in Hubco from 20.7 per cent to 16.6 per cent.

Stock brokers link net withdrawals of $58.7 million portfolio investment from the UAE-based foreign investors to profit-taking by overseas Pakistanis having enough exposure in Pakistani stock markets. Mr Habib seconded this view.

But he did not agree with those who believe that withdrawals by the UAE-based investors represented offloading of shares by super-rich Pakistanis who keep their ill-gotten wealth there and invest part of it in Pakistan. "I do not think this is the case," he said.

Whereas portfolio investment from the UK and the UAE remained highly negative in April the US-based investors made a modest investment of $1.7 million during this month.

Investors based in Switzerland and Hong Kong also made net investment of $2 million and $9.3 million, respectively. Senior stock brokers say that portfolio investment from these countries in the month of April shows the investment was made primarily by overseas Pakistanis settled there.

"The reason is many overseas Pakistanis in these two countries act as frontmen for super-rich textile barons and top stock brokers," said a senior KSE member who declined to be named. "It is the money mostly tax-evaded which first goes to such places and then comes back whitened via portfolio investment," he remarked.