Mutual fund assets hit record high of Rs2.097 trillion on interest rate, stock market boost

KARACHI: The mutual fund industry saw assets under management hit a record high of Rs2.097 trillion as of December 2023, as investors sought to benefit from the country's high interest rates and stock market rally, data showed on Wednesday.

The industry's assets grew by 6.7 percent from Rs1.965 trillion in November. The growth was driven by strong demand for fixed-income and money market funds, which accounted for more than half of the total assets, as the central bank kept its policy rate at 22 percent since July, one of the highest in the world.

Since September 2021, the central bank has raised its benchmark interest rate by a total of 1500 basis points, reaching 22 percent in June 2023, to curb the growing rate of inflation. This has resulted in a growth in fixed-income mutual funds.

Citing positive real interest rates on a forward-looking basis, the State Bank of Pakistan has maintained the policy rate since July 2023. “The rise in AUMs [asset under management] is mainly due to the elevated interest rates during the last couple of years which attracts the investments in fixed income/money market,” said Tahir Abbas, head of research at the brokerage house Arif Habib Limited, which is based in Karachi and provided the mutual fund data.

The equity assets under management did well due to the remarkable performance of the stock market. The rally in the local bourse started in the second half of last year after Pakistan secured final approval for a short-term $3 billion bailout package from the International Monetary Fund in July.

By December 2024, analysts expect Pakistan's benchmark share index, the KSE-100, will reach 85,000 points. The rising dividend yield, which is being driven by a mix of robust earnings growth, lack of capital expenditure, and improving cash flows of energy businesses, along with the anticipated 700 basis point interest rate cut this year, could keep the stock market momentum positive.

Given the possibility of an interest rate cut in the coming months, analysts see that the portfolio of the mutual funds has started to gradually shift from the fixed income to the equity classes. The ongoing decline in lending rates, the yields on Treasury bills and bonds, and the expected drop in inflation all indicate to the SBP's impending monetary easing.

Pakistan's consumer price index (CPI) for December rose 29.7 percent from a year ago. The SBP expects the inflation rate to ease to 20-22 percent in the 2024 fiscal year.

Investors may be concerned about the political climate, which is expected to stay turbulent even after the election and the external account continues to be the economy's weak point.

As the government has approximately $22–24 billion in external debt obligations in FY24–25, the next IMF programme will be crucial for maintaining discipline amid larger reforms required for sustainable growth.