‘13 percent return on debt prompts Pakistan investors to shun equities’

KARACHI: A recovery may elude the world’s worst-performing equity market as investors in Pakistan switch out of stocks and into fixed income offering double-digit returns, Bloomberg reported on Wednesday.

The prospect of earning more than 13 percent from debt is proving too hard to pass up with the nation’s equity market refusing to show signs of life after being in the doldrums for more than two years.

The central bank’s efforts to curb inflation and stabilize its currency by raising borrowing costs will keep fixed income attractive for longer, analysts say. “The outlook for growth and earnings is not there” for equities to perform, Ayub Khuhro, Chief Investment Officer at

Faysal Asset Management Ltd., said in an interview.

“The only area where you will make money is fixed income.” The two asset classes have had a turn in fortune. The benchmark equity index has slumped 41 percent since rallying to a record in May 2017 as Pakistan’s return to emerging-market status sparked outflows instead of the expected inflows.

Debt securities have become attractive after the central bank more than doubled its policy rate to 13.25 percent -- the highest in Asia -- over 10 meetings to help stabilize the economy. Pakistan’s mutual fund industry held 52 percent of its Rs540 billion of assets in debt, up from 31 percent two years ago.

And inflows into the state-owned fixed income plan for individuals, whose returns are linked to the central bank’s policy rate, jumped 10-fold in the four months ended April from a year earlier, according to the most recent data.

Meanwhile, the average traded volume in members of the KSE-100 equity index dropped 62 percent in July from a year earlier. “Why would I go into equity when I can invest at rates as high as 14.25 percent,” said Khuhro. “Equity should be looked at around December next year.”

Pakistan’s stock market has been one of the world’s worst performing over the past two years, with its benchmark 100-Share Index losing almost a third of its value since hitting an all-time high of 53,127 points in May 2017.

The market has been hammered because of political instability and a weakening economy that has seen growth slump amid a blow-out of the fiscal and current account deficits, leading to an agreement with the International Monetary Fund for a $6 billion bailout last month.

The government in May approved a 20-billion rupee ($134 million) fund to help boost the stock market after big losses over the past two years.