KARACHI: It was not very long ago when the Pakistan Stock Exchange (PSX) dominated the $121-billion MSCI frontier market by having 10% weightage before it left in June last year to join the prestigious $5.3-trillion emerging market club.
Pakistan equity market participants were expecting a minimum foreign portfolio investment of $250 million, mostly from passive or index-tracker funds. However, what happened actually is not a very pleasant story to recall and is all water under the bridge.
Besides some obvious reasons such as Pakistan’s low weightage in the emerging market, there were some global events that forced investors in general to think about relative attractiveness of the emerging market for higher returns.
Since President Trump was sworn in at the Oval Office, his emphasis on a single-point agenda, which he described in his inaugural speech as “From this moment on, it’s going to be America First”, created a lot of stir in the investment world.
Besides this, the other major factor that threatened the sustainability of emerging markets was the rate hike by the US Federal Reserve (Fed) for the first time after years and rising tension due to the trade war and counter-measures by China.
All these factors have alarmed and triggered panic among the emerging market participants.
Some major cracks started to appear along the emerging markets’ fault lines when recent jolts in Brazil, Turkey and Argentina began to make investors nervous. The risk of spillover to other emerging markets looks real as they all have to tighten their belts, which may result in a slump in the equity market.
Also for the fixed income side, the risk of downgrade by rating agencies is looming. In fact, emerging markets already took a big blow at the beginning of the year when credit rating agency, Standard and Poor’s (S&P), cut Brazil’s debt rating to ‘BB-‘, which is below investment grade.
Blessing in disguise
Pakistan’s lowest weightage of 0.11% in the Emerging Market index can also be described as a blessing in disguise, where any major future sell-off by passive index funds and exchange-traded funds (ETFs) can miss Pakistan in a rounding-off process.
Also emerging markets’ fund exposure to Pakistan is already negligible as investors are mostly staying on the sidelines and following a wait-and-see policy.
As per the National Clearing Company of Pakistan Limited’s (NCCPL) data, the strategy of foreign investors has not changed much post-general election and they have so far sold portfolio worth $63 million, dominated by foreign corporates, vs $73 million before polls.
However, the silver lining is that all this sell-off is being absorbed by local institutions and individuals.
This also shows that liquidity is not an issue locally and investors are always hunting for bargains as and when market provides them with the opportunity due to some noisy political event.
However, in general, investors are mostly sidelined these days as evident from the sideways movement of the index in a narrow band as well as lower trade volumes.
All eyes are set on policy statements and directions set by the new Pakistan Tehreek-e-Insaf (PTI) government. Most importantly, investors are keen to know short- and long-term plans of the government to tackle both the current account and fiscal imbalances.
Recent episodes of currency depreciation across all emerging markets, including Pakistan, have kept investors at a distance where speculation over further currency rout in emerging markets remains a major impediment.
Long before the start of the current emerging market crisis, the PSX was tackling its own home-grown issues, such as the security situation and political turmoil for the last few years, which kept a lid on the performance of the market with a history to grow at a compound annual growth rate (CAGR) of 22%.
These local issues created an additional discount for the PSX, which is currently trading at an attractive valuation (KSE-100 P/E 8.79x) vs regional peers like India (Sensex P/E 20.66), Vietnam (VNIndex P/E 17.17) and Bangladesh (DSEX P/E 15.67).
However, the good news is that political issues are almost settled and security situation has improved significantly. Therefore, the selling point for Pakistan to the cautious emerging market players could be a turnaround story at a bargain price with one of the best dividend yields in the emerging markets.
Although global macroeconomic factors described above are currently dominating the emerging market investment horizon, if some concrete steps are taken by the new government for solid economic recovery and sustainable growth, then it may trigger a long-awaited bull run at the PSX.
The writer is a financial market enthusiast and attached to Pakistan stock, commodity and debt markets
Published in The Express Tribune, September 24th, 2018.