Stock exchange unmoved with foreign outflows

KARACHI: Foreign portfolio investors have withdrawn $110.96 million out of Pakistan’s bourse since the beginning of 2017, which takes fiscal year’s withdrawal to $408.86 million to date, but the market remains unmoved.

Based on a survey with local fund managers, Topline Securities is of the view that the market can absorb $500-$700 million of foreign selling without substantially affecting current share prices. 

“Additional leverage can absorb around $200-$300 million, thanks to ample liquidity, and the balance can be absorbed by local and foreign fund flows,” Saad Hashmey at Topline Securities said in a report.

Foreign portfolio funds at any one time generally command about 30 percent of the local equity market that has a total capitalisation of more than Rs9.5 trillion. Fund managers expect foreigners to be net buyers of around $100-$200 million in 2017 as compared to net selling of $339 million in 2016.

“This is based on inflows of $600 million from passive Emerging Market (EM) Funds, outflow of $200 million from passive Frontier Market (FM) Funds and net outflow of other foreign investors that is expected to continue in line with the global trend,” Hashmey said.

Pakistan’s market was witnessing massive outflows, but this trend would likely reverse with the much anticipated upgrade to MSCI EM in May 2017. Net inflow was also seen in case of Qatar and UAE when they were upgraded to EM.  Analysts believe that continuation of current low interest rate environment will benefit local equities, while flows from mutual funds and non-banking financial companies seen during the last couple of years will continue this year as well.

Hashmey said there was a strong likelihood of an amnesty scheme in 2017, which would be along the lines of what was implemented in Indonesia in July 2016 that led to inflows of around $10 billion in the Indonesian economy.

“Given that Pakistan’s economy is 1/3rd the size of Indonesia, possible inflows of $2-3 billion can potentially be realised by such an amnesty scheme adding to local liquidity,” Hashmey added.

However, the first and foremost key risk to market outlook was higher than anticipated foreign selling. If the market experienced net foreign selling of higher than $500-$700 million, than the market momentum would likely lose steam.

Other key risks include a significant reversal in interest rate cycle during the year, higher than expected rupee devaluation, and additional regulations for stock market aimed at curbing over-speculation. Lastly, political noise might lead to issues for the current democratically elected government, which might have negative bearing on the market.