KARACHI: The foreign corporate selling continued to impact Pakistan’s stock market sentiment in 2021 as net foreign selling has clocked in at $365 million till December 27, 2021 as compared to $572 million in 2020.
The selling in 2021 was dominated in Banking, Oil and Gas Exploration and Fertilizer sectors, amounting to $167 million, $60 million and $55 million, respectively.
Pakistan was also reclassified from Emerging to Frontier Market by MSCI recently as the country saw gross and net outflows of $107 million and $58 million, respectively on rebalancing date that is November 30, 2021.
During the past seven years, total net foreign selling has been recorded at $2.6 billion, which is around 15 percent of average free float market capitalization.
Last time when Pakistan saw any major foreign inflows was in 2017 when Pakistan was upgraded to MSCI Emerging Market (EM Index) as the country saw gross foreign buying of $452 million on May 31, 2017 – which was the rebalancing date.
Similarly, secondary market offerings of Habib Bank (HBL) and United Bank (UBL) by government of Pakistan saw inflows of over $1.0 billion in 2014/15.
“Sharp currency devaluation, volatile macro environment, lesser concentration of IT stocks, and outflows from emerging markets have been few of the key factors behind the outflow over the years at PSX,” Umair Naseer at Topline Securities said.
Pakistan current account deficit in first five months of FY22 rose to $7.1 billion as compared to $1.9 billion in the same period last year. Consequently, Pak rupee lost 11 percent of its value against USD in 2021 to date.
Within the regional markets, except for India, China and Indonesia, other markets saw foreign outflows in 2021.
Consequent to this foreign selling, the stocks and sectors having high foreign portfolio investments (FPI) have largely been underperformers at the Pakistan Stock Exchange (PSX) in last few years, he said.
Due to non stop selling by foreign funds, total foreign ownership of Pakistani stocks has now reached a decade low of $2.1 billion (17 percent of free float and 5.0 percent of market cap) as per latest SBP data from a peak of $8.3 billion (30 percent of free float and 9.0 percent of market cap) seen on January 06, 2017.
“We believe that out of the $2.1 billion, shares worth of $0.4-0.8 billion is held by foreign sponsors or strategic investors as classified by SBP which are likely not to be offloaded in market,” Umair Naseer said.
Even out of the remaining foreign holding, some foreign holding pertains to illiquid stocks like Nestle Pakistan (NESTLE), Colgate Palmolive (COLG), Pakistan Tobacco (PAKT), Murree Brewery (MUREB) etc. These illiquid shares may be privately placed and not directly affect local liquidity. Hence, any major selling in 2022 is not likely, he said.
With respect to inflows from Frontier Funds post Pakistan classification to Frontier Markets, it is difficult to gauge the expected inflow due to lack of data availability.
“However, given Pakistan small weight of 1.25 percent in MSCI FM index and reduced foreign ownership of Pakistani stocks, we expect small inflow/outflow of $50-100 million in 2022,” he said.
Moreover, many Frontier Funds tracking Pakistan have either closed down or their Assets Under Management (AUMs) have come down significantly due to redemptions. Hence, major inflows from frontier markets are also less likely, He added.
International money managers also believe that foreign flows in frontier and frontier market performances will be dependent upon how well these countries manages Covid-19 challenge and address economic challenges specially of rising inflation rates.
Copyright Business Recorder, 2021
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