Foreign investors' stakes in companies listed on the Pakistan Stock Exchange (PSX) have plummeted over the past decade, reaching a historic low of 3.7% ($491 million) of the total value of publicly traded shares in the fiscal year ending June 30, 2024.
According to a report titled "Market Strategy: Unveiling the Flow – Liquidity Dynamics at PSX" by Arif Habib Limited, foreign ownership as a percentage of free float market capitalisation stood at 28.7%, or $2.97 billion, in FY17. This foreign shareholding excludes strategic investments, whether or not they include management control, in both listed and unlisted companies in Pakistan.
Over the past decade, economic and political instability, coupled with high volatility in the rupee-dollar exchange rate, have significantly dampened foreign investment. Despite global investment dropping to the record low level 3.7% or $491 million, foreign investors injected $141 million into the PSX in FY24.
These recent inflows occurred amid signs of political stability, early indications of economic recovery, and a stable rupee-dollar exchange rate in FY24. This stability followed the successful completion of a nine-month International Monetary Fund (IMF) loan programme worth $3 billion in April 2024 and the IMF staff-level agreement for an additional $7 billion bailout package in July 2024.
PSX emerged as the world's best-performing stock market in FY24, soaring 89% in rupee terms (94% in US dollar terms) to close at 78,445 points, compared to FY23's closing at 41,453 points. The index reached an all-time intraday high of 81,940 points in mid-July 2024, closing at 78,570 points on the final day of trading on Friday.
Following its transition from an MSCI Emerging Market (EM) to a Frontier Market (FM) in 2009, the PSX saw a significant inflow of foreign investment, with $573 million pouring in during FY10. This influx set off a substantial period of foreign investment, culminating in total inflows of $1.72 billion over the next six years, with the exception of FY12.
However, from FY16 to FY22, the PSX experienced significant foreign outflows amounting to $2.27 billion, predominantly affecting sectors such as banking, exploration and production (E&P), cement, and others.
Despite the strong performance of the KSE-100 index in FY24 and Pakistan's status as a frontier market, the index continues to trade at an attractive price-to-earnings (PE) ratio of 4.1 times, representing a significant 77% discount compared to its peers. Looking forward, analysts anticipate another surge in foreign investment in the coming years, particularly with the onset of the $7 billion IMF programme. The PSX is not only the cheapest market in terms of PE and price-to-book (PB) ratios but also the most rewarding, offering the highest dividend yield, according to the research house.
State Life leads local market activity
During FY24, local flows were dominated by insurance companies, which were the largest net buyers with $126 million in investments. Other companies followed, with a net buy of $36 million. Conversely, other local market participants were net sellers, with banks and development financial institutions (DFIs) offloading $141 million and individuals selling $60 million worth of shares.
"Analysing the insurance flows, we observe that State Life Insurance played an anchor role by increasing its stake in the market and investing heavily when stocks were available at bargain prices," the research house noted.
State Life Insurance increased its market exposure by investing Rs40 billion ($142 million), not only maximising its portfolio returns but also positively influencing market direction. Compared to the market highs of 2017, State Life is the only institution that has increased its holdings, now accounting for 6.2% of the free-float market compared to 4.2% in 2017. On the other hand, banks, mutual funds, and other insurance companies (excluding State Life) hold less than they did in 2017, currently at 6.9% (2017: 7.7%), 7.1% (2017: 12%), and 1.6% (2017: 4%), respectively.
Individuals, companies, non-banking financial companies (NBFCs), and others now hold 72.6% of the KSE All free-float, compared to 43.4% in 2017.
"We reiterate that a 1% shift from fixed income to equities by mutual funds and insurance companies (excluding State Life) is expected to generate inflows of Rs26.8 billion and Rs3.7 billion, respectively. For State Life Insurance, this shift is projected to result in an inflow of Rs15 billion."
The KSE-100 Index reflects a combination of corporate performance and investor confidence in Pakistan's economy. "We believe that the government's economic reforms under the IMF's $7 billion Extended Fund Facility (EFF) should bolster investor confidence in the market. Additionally, the new IMF programme will support inflows from multilateral partners, rollovers from bilateral partners, and help bridge the external financing gap."
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