Portfolio managers await 10 percent rupee depreciationto re-enter market

KARACHI: Portfolio managers are eyeing a 10 percent rupee fall, external account’s recovery and political stability to re-enter Pakistan’s equity market that’s been longing for funds since the country’s upgrade to Morgan Stanley Capital International (MSCI) emerging market index in May.

“We believe it would take political clarity, 10 percent currency depreciation and ease in balance of payment position’s situation before EM (emerging market) trackers start taking positions in Pakistan,” Executive Director Research Zeeshan Afzal at Insight Securities said on Friday, referring to the brokerage’s analyst roadshow meetings with 13 fund managers across the US.

Afzal said the view was in agreement with the brokerage previous roadshow in Europe in July “where we were unable to find a single portfolio manager with clear bull stance over Pakistan for the next 12 months.”

He said foreign investors drew out $437 million in 2017 to date despite that the benchmark KSE 100-share index of Pakistan Stock Exchange (PSX) witnessed a 23 percent price correction in the last six months, resulting in 33 percent valuation discount of KSE 100 to the MSCI EM index.

In May, US index provider MSCI upgraded the country to emerging from frontier markets status, exposing it to international investors who track the EM index with $1.4 to 1.7 trillion. Although more than 300 foreign portfolio investors have been registered

with PSX since then, the reality beat the inflow expectation.

The research director said weak external account and fears of sharp depreciation were the major cause of the managers’ concern during the meetings. He said sharp depreciation of above 15-20 percent would be taken as negative as it would increase the risks of inflations, monetary tightening and a loss in consumer/business confidence.

“We see 4 percent rupee depreciation in FY2018 and another 6 percent in FY2019, while we sensed that it would take at least 10 percent depreciation to make FII’s (foreign institution investors) comfortable to reenter the market,” he added.

The analyst said most of the portfolio managers were expecting 10 to 20 percent loss in the index in dollar terms in one year time.

“Some of the PMs (portfolio managers) were actually comparing rupee with the Egyptian pound and Nigerian Naira, which depreciated 40-50 percent last year, right after their central

banks scrapped the currency peg.”

Afzal, however, said rupee is not comparable to those countries as the dollar flow is strong and rise in imports is partly linked with increased investments in power and construction sectors.

Rupee underwent the biggest single day drop in the nine years on July 5 when it lost 3.1 percent to Rs108.25 from a day earlier in the interbank market. However, rupee recovered to 105.50 next day after the government’s intervention.

The stocks analyst said spread between interbank and open market dollar rate is normal, while foreign exchange cover is available at normalised rate and there is ample dollar liquidity in open market. He projected current account deficit at $12-14 billion for the next two to three years. Loans would bridge the gap, he said.

“Start of in-house structural reforms to address BoP (balance of payment) position problems would be a key sentiment booster.” Afzal further said the fund managers expressed concern over the continuity of the growth agenda and China-Pakistan Economic Corridor projects.