Investment hotspot: Investor confidence drives stock market boom

Foreign investors pour $141.3 million into bourse in July-Oct this year.

KARACHI:

A familiar refrain against the stock market goes like this: “Most indicators show the economy is going down, but the benchmark index is rising nonetheless. What makes investors so upbeat about our stock market anyway?”

A simple explanation of the phenomenon lies in the confidence that foreign investors have in Pakistan’s equity market. “Foreign investors can drag the stock market in any direction,” said an analyst associated with a brokerage house while speaking to The Express Tribune.



The Karachi Stock Exchange (KSE) 100-Share Index jumped 355 points on December 5 mainly because of foreign investors’ interest in index heavyweights in the oil exploration and production sector.

He added that the strategy most foreign institutional investors follow is ‘buy and hold’. “An increasing amount of foreign portfolio investment shows they are optimistic about the long-term prospects of Pakistan’s economy,” he noted.

According to the State Bank of Pakistan (SBP), Pakistan attracted a total foreign portfolio investment of $141.3 million during July-October as opposed to $123 million in the corresponding four-month period in fiscal year 2012-13. This shows a year-on-year growth of 14.8%.

Foreign portfolio investment amounted to $119.5 million in fiscal year 2012-13. It was at its highest level of $1.8 billion in 2006-07.

Out of the total foreign portfolio investment in the four-month period, the highest inflows came from the United States, which amounted to $62.1 million.

Many analysts believe portfolio investment from the United States will continue until the US Federal Reserve tapers its ongoing quantitative easing policy that aims to stimulate the American economy by central bank’s purchase of government bonds and other financial assets worth $85 billion every month.



One of the consequences of the injection of liquidity by the Federal Reserve in the American economy is higher investment in emerging markets, such as Pakistan. Resultantly, stock markets from Brazil to Pakistan are flushing with investments from the US, and the trend is likely to continue until the tapering of the quantitative easing policy.

“I think the US is going to stick to quantitative easing until March at least. It may be scaled back afterwards, but the pace of tapering will likely be slow,” the analyst said, adding foreign portfolio investment is expected to remain high until the end of the current fiscal year.

However, it will be unfair to attribute foreign inflows to US quantitative easing alone, as the Karachi stock market is one of the best performing stock exchanges in the world.

The benchmark index has risen by a phenomenal 50.8% between January 2 and December 6 this year. Similarly, the KSE-100 Index increased 48.5% in fiscal year 2012-13, which made it one of the best performing bourses in the world.

“Strong (corporate) fundamentals and a huge consumer base make the Karachi stock market a destination of choice for foreign investment,” he added.

Published in The Express Tribune, December 9^th, 2013.

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