THE story begins in January 2015 when a little known Miami-based fund, Everest Capital suffered crippling losses in currency trading. CNBC reported that a single bad bet on the Swiss franc may have caused $860 million of its total $3 billion assets under management being wiped out.

It was fast becoming apparent to the financial community that the fund’s investors would soon be lining up outside its doors to redeem their investments and salvage what remained of them.

According to a Bloomberg news article, a significant portion of Everest’s investments were parked in emerging and frontier markets and across different asset classes. These included a real estate company in the United Arab Emirates, minority equity positions in some Indian banks, Chinese internet companies, Brazilian education firms and banks as well as renewable energy projects across emerging markets — in investor parlance known as FDI (foreign direct investment). In Pakistan, Everest’s investments were in equities — termed as FPI (foreign portfolio investment) — that brokers at the Karachi Stock Exchange estimated at $150m.

The panic at the stock exchange was entirely unjustified.

Stock market investments (FPI) are relatively easier to liquidate — and therefore more volatile — than FDI. That when the crunch came, Everest would aggressively sell off its portfolio investment in Pakistan, was a foregone conclusion for those who knew the goings on in January 2015.

Yet, Everest’s $150m portfolio constituted only a tiny part of the total nearly $6.6bn (around 2pc) of FPI in Pakistan. This meant it should not have caused a major disruption on the bourse. Yet it did. Here’s what happened:

By late January, sizeable foreign selling became discernible on the Karachi Stock Exchange. Everest had clearly begun to offload its Pakistan portfolio. But something else was also at work. A Feb 5 report in the local English press mentioned that on Feb 3 “out of nowhere, the sponsors of K-Electric have offloaded 4pc of their stake on the Karachi Stock Exchange”. The next day the KSE100 index decline began. Interestingly, Abraaj operates in roughly similar markets and asset classes as does Everest.

In its morning call of Feb 13 2015, circulated to its clients, leading stockbroker JS Investments highlighted that during the previous 15 trading sessions $65.6m in FPI had been pulled out, causing the index to sharply decline as fears of further selling from the foreign front crept in. Of this “around $53m net selling was witnessed in the electricity sector where Abraaj offloaded shares worth $65m in K-Electric,” the report said.

This was a major sell-off in a market that was already bracing for decline. As prices fell, Everest Capital intensified its distress sale and by March 13, the KSE100 was down 6.5pc from its peak at the start of February. But even more ominous to investors was the flow of steady data indicating sustained foreign selling. The figures included the total of $65m by Abraaj and whatever proportion of its $150m that Everest had sold.

All it takes at moments like this is for somebody to shout ‘fire’! And a stampede to the exit door follows. By March 30 the index had tumbled nearly 15pc which meant that over $10bn in investors’ assets had been wiped out. Those who rushed to the exit door were mainly leveraged investors; capital protected funds that guarantee the principal amount will not be lost. Interestingly none of the other foreign funds chose to exit despite rumours to the effect.

Then of course the expected thing happened. Markets emerge stronger after such shakeouts. The index went on rebound as investors flocked to pick up stocks at mouthwatering prices. Measured on forward earnings, Pakistani equities still trade at less than 50pc of those in peer economies (India, Indonesia, Philippines and Thailand) and as such will remain attractive for a long time.

The panic was entirely unjustified. Political risk and macroeconomic fundamentals have not been better in a long time. Low oil prices have brought down inflation and government deficits. Interest rates have been lowered. LNG and renewable energy have begun to arrive in the system. Moody’s has upgraded Pakistan’s bond rating and remittances continue to rise. Pakistan has successfully completed an International Monetary Fund programme and is qualified for further funding. And on the political front an anti-terrorism strategy is being implemented and there has not been much blowback.

Meanwhile, Pakistan awaits the arrival of the Chinese president this week during which major agreements are likely to be signed on the Pak-China corridor. With its new Asian Infrastructure Investment Bank, China also appears to now have a mechanism to finance these projects. Further down the horizon lie the government’s privatisation and power-sector reform agendas.

After the tumult, there may be a fair bit of good news for KSE investors in the days to come.

The writer is a business strategist and entrepreneur.

moazzamhusain@gmail.com

Published in Dawn, April 5th, 2015

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