Now the Pakistan Stock Exchange is witnessing an increase in investment from local mutual funds, after having surged on the back of foreign investment, let us see the repeating patterns and compulsions on market participants.
Just three days ago, these funds were net sellers, with a combined total of over $2.1 million in sales year to date. However, in the past three days, they have shifted to become net buyers, accumulating over $4.89 million in purchases. This turnaround has placed their cumulative net activity in positive territory for the first time in over three months.
This change in behavior is likely attributed to their structured investment approach, which they are forced to follow, which often prompts them to enter the market after a certain level of growth has been reached. Moreover, these funds are influenced by the money flow influenced by market momentum. The market momentum affects new investment flows into the funds as well as redemption activity.
Foreign investors wield significant influence over the PSX, and they have primarily driven the market to this level. A strategic move by a major foreign player could easily induce a market downturn. Conversely, sustained buying by local mutual funds could generate their own momentum, further driving the market upwards.
Nevertheless, several factors raise concerns about the sustainability of this rally. The upcoming monetary policy meeting is anticipated to maintain high interest rates due to escalating inflation. Additionally, potential conditions imposed by the International Monetary Fund (IMF) could adversely affect the real economy. Furthermore, the rise in oil prices and a stagnant exchange rate stemming from weak exports and foreign inflows pose additional challenges.
However, the market may continue to disregard fundamentals. Pakistan's market is extremely cheap based on asset value and replacement cost. High interest rates and exchange rates have made capacity addition exorbitantly expensive, creating a significant barrier to entry. This, in turn, makes existing capacity even more valuable.
Coming back to investment patterns and compulsion.
In addition to local mutual funds, insurance companies also exhibit an intriguing pattern at the PSX, albeit in contrast to the behavior of funds. More details on this will be discussed later.
