Drying up: Shrinking foreign investment takes the shine off KSE, brings market volumes down

Average turnover on bourse drops to $29m against $95m earlier.

KARACHI: The stock market has been dull of late.

Although the benchmark index of the Karachi Stock Exchange (KSE) has risen 16% from its pre-general election level, surprisingly low average daily turnover seems to have taken the charm away from the bourse for now.

Average daily turnover has dropped to just $29 million in recent sessions as opposed to $95 million recorded in post-election sessions, according to KASB Securities, a brokerage house based in Karachi. The last time the bourse recorded such a low level of activity was seven months ago in March.

Analysts attribute the recent slowdown in the impressive surge in the KSE 100-share index – up 31% since January – to shrinking foreign inflows. Net foreign institutional portfolio investment (FIPI) between September 1 and September 9 remained a mere $0.2 million.

Speaking to The Express Tribune in an interview, Topline Securities CEO Mohammed Sohail said besides seasonal factors, such as the typical lull in trading just before Eidul Azha, there are three reasons for recent drying up of foreign portfolio investment.

“Flows from the United States have slowed down throughout the frontier and emerging markets because of uncertainty about the future of the stimulus package,” Sohail said, referring to the $85 billion-a-month stimulus programme of the Federal Reserve, the US central bank, known as quantitative easing. “This factor is not Pakistan-specific.”



Net foreign portfolio investment on the Karachi bourse has amounted to approximately $324 million since the beginning of 2013.

Secondly, Sohail says, foreign investors have apparently withheld investments on the same reasons that have dampened sentiments of domestic investors – upward revision in interest rates coupled with the currency coming under severe pressure.

“Foreign investors are probably waiting for the 3G auction and privatisation process to kick in, so that Pakistan can get on the global radar screen. Only then foreign investment will resume, leading to an increase in foreign exchange reserves and improvement in liquidity,” he said.

Last but not least, Sohail says, trading can never get back to its previous levels unless domestic investors start taking interest in the stock market again. The market volume is invariably created by these investors, he says, as they also include intra-day traders unlike foreign investors.

“There would be roughly $10 million foreign buying a day when there used to be $100 million daily business two months ago. How can you expect a high level of participation by foreigners if daily business is just around $30 million?” he asked.

As for the improvement in the liquidity situation, Sohail says foreign inflows are expected to increase by the first quarter of 2014.

“Liquidity drives the market. The government has been sucking liquidity out of the market now. But with foreign inflows on account of privatisation deals and 3G, its dependence on current sources of financing will diminish in six to 12 months,” he said.

“I expect the liquidity situation to improve in the second half of 2014,” Sohail noted.

Published in The Express Tribune, October 16^th, 2013.

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Correction: In an earlier version of this article, the net foreign portfolio investment on the Karachi bourse was mentioned in billions instead of millions. The error has been fixed.