How is it that in an environment like this, foreign investors are pouring money into Pakistan and the market has risen to record highs while local investors are net sellers?
My short answer is: money on one side and arguments on both.
Leaving aside the fact that foreign investors haven't really poured in a significant amount, having made net purchases of just $150 million in the last year while still being net sellers of over $1.5 billion over the last five years, let me narrate an incident from the second half of 2002, the year after September 11. We were making a presentation at the Karachi Chamber that was unrelated to the stock market. After the presentation, a businessperson asked why the stock market was increasing at such a fast pace when the business environment was in such a terrible state.
Just as in 2002, in the year 2023, we were rerated upon the lifting of the default verdict. The market just needed a small push to rise from its dysfunctional state.
At around the 40k level of the KSE 100 Index, the stocks' true value became more apparent to their rightful owners, and a record number of buybacks were announced. The halving of the value of the Pak Rupee since 2018 and its severe downturn in 2022-23 made existing installed capacity very valuable. Now there was a considerable barrier to entry to compete. It became evident that adding substantially to this capacity or installing more to compete was not an option. Instead, the owners found it more profitable to acquire their own shares through buybacks.
And as soon as the IMF engagement with Pakistan deepened in its recent round, the default scenario changed, and foreign investors, finding the market cheaper than when they were exiting, came back. For the last couple of years, global stock markets have been consistently rising, with enough liquidity in the system for passive flows. As I wrote before, foreigners sold OGDC to local investors at around $1 per share when they exited the Pakistan Stock Exchange and are now buying it at less than half a US dollar.
It is also interesting to note that this is the fourth phase of foreign portfolio investors' engagement with Pakistan.
In the first phase in the mid-nineties, emerging markets were all the rage. We also benefited from that, but soon it became apparent that our market was primarily opportunistic in nature or just frontier. Going by portfolio weights was not the norm at that time, so in the first phase, passive flows were limited, and foreign investors' engagement with local institutions and companies was higher and more in depth. Geopolitics rose its head forcing foreigners to exit.
Skipping the second phase post 9/11 and coming to more recent interactions with the foreign investors.
In the third phase, the foreign portfolio investors' stance on Pakistan was that of institutional fund management, reflecting the changing landscape of global fund management practices. We, too, spoke with optimism in those fund management terms and were becoming part of that evolving landscape. Additionally, in this phase, Pakistan also received classification as an emerging market, further solidifying its position within the global investment community.
continues....