Investor sentiment and reality

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THE net investment of $2.5 billion by foreign funds in the Pakistani stocks could be reckoned as insignificant at the Karachi Stock market that commands aggregate market capitalisation of a huge $3 trillion.

But the sentimental impact of the entry or exit of overseas investor is generally regarded to be disproportionately enormous.

The Standard and Poor’s historic downgrade of US debt to AA plus from triple A, pushed financial markets all around the globe in turmoil and tremors were also felt at the KSE, which experienced unprecedented volatility.

Following the S&P downgrade last Friday,the KSE-100 index sank by 471 points or four per cent on Monday — the first trading day of the week. But the Federal Reserve of US stepped in to calm the markets by pledging to keep interest rates at zero for next two years, which helped most global markets, including the KSE, to rebound.

However, the Wall Street was rattled again the next day with three per cent dip in stock values. Most investors who thought locals would follow suit at the KSE, were surprised to see the index take a huge plunge but quickly recover to close just 46 points down.

“Even that was on account of fall in price of share in OGDC by Rs5,” said a trader, pointing out that due to its heavy weightage in the index, the price drop translated into 80 points decline. “Excluding the OGDC, the KSE would have ended in green on Thursday,” the trader said.

All of that pointed to the fact that Pakistan capital market did not necessarily follow the global markets. “Even the stock dip early this week was on worries over potential heavy sale of equity by foreign investors in KSE stocks,” said an analyst.

And for all the huge losses by foreign fund managers in global markets, the net outflow of portfolio investment from KSE has been essentially insignificant.

Net sale of equities by overseas investors during the week was slightly short of $10 million, with minor net buy of $0.9 million on Thursday. “It should calm fears of local investors, who were selling in anticipation of heavy foreign outflows”, said analysts. Most stock strategists pointed to the corporate earnings growth of 20 per cent, declining inflation and interest rates, that they contended could be alluring to off-shore investors.

But many curse the foreign investor as a spoiler of the market. Some cool-headed market participants, however, point out that the overseas portfolio investment was the saviour of the market, when everyone was avoiding the stocks like a plague. Most analysts though admitted that foreign fund managers would rightly weigh returns against risks. In case the global markets were rampaged by the bear, it would be naive to assume that the KSE would remain immune.

Foreign investors were rarely regarded as a panic prone herd. The dollar investment in equities remained unruffled in the summer of 2010, despite the flash floods that ravaged the country. “Foreign investment in equities in 2010 was at the peak,” reminded one stock broker.

Mark Mobius, head of Templeton Asset Management, that holds 55 per cent of the free-float in the market direction-setting OGDC, had expressed his confidence in the Pakistan equities: “The bottom line is that Pakistan is not going to go away. We want to buy stocks that look cheap as prices come down,” he said.

A broker who asked not to be named stated: “Investment gurus  such as Mark Mobius, one of the largest foreign investors in Pakistan equity, cannot be expected to fool around if there was nothing attractive for him to continue pushing dollars in the country’s equity market”.

Zubair Ghulam Hussain, head of Equity Sales at Foundation Securities–the local affiliate of Macquarie, recognised among the top five brokers in Asia, pointed out that many Pakistani stocks offered handsome returns, which even put into shade the KIBOR bench mark interest rate of 13.5 per cent.

Zubair thought that Pakistan was greatly insulated from the effects of the US and European Union recession due to the fact that the country’s economy was “domestic demand story”, meaning that export contribution to GDP was negative.

Secondly, 80 per cent demand of light Arab Crude was met through imports. “The 20-25 per cent fall in global oil prices will be beneficial for the country as it could help rein inflation and help lower interest rates,” he said.

Pakistan also was not dependent on capital flows as the foreign direct investment was not plentiful and the country looked up to multilateral agencies, the IMF and World Bank for funds.

Interestingly, the inflow of foreign funds in Pakistan equities had set the cynics wondering if all of that was genuine foreign buy. Tongues were wagging and the argument that carried some weight — according to analysts and brokers who asked not to be named — concerned the ‘laundering’ of ‘undocumented’ money in the stock market, by ‘re-routing’ it through foreign destinations such as Luxembourg, Cayman Islands and some others that have always been good conduits for channeling unquestioned funds.

But not everyone at the market subscribes to that view. Many brokers and analysts, when unable to deftly deny local money coming back as foreign inflows, say that in the overall foreign investment figures, such an amount, if any, should be negligible. “Besides”, snapped a stock broker: “Dollars flowing into the stock market from abroad is foreign investment, whether the money belongs to the locals or the ‘goras”.


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