KARACHI: Foreign investors offloaded $118 million worth of equities at the Pakistan’s stock market during the first two months of the current fiscal year as currency devaluation is feared to eat into their returns, industry officials said.
Foreign portfolio investors have pulled out a net of $118.368 million from the country’s bourse since July 1, while net outflows clocked in at $80.463 million since August 1. “Though government has ruled out currency devaluation in the short run, foreign investors still fear sizeable devaluation, which would trim their dollar-converted returns,” said an executive at an asset management company.
Analysts said if the central bank doesn’t stop intervening into foreign exchange market and lets rupee correct itself foreign investors would stay away from equity investment. “If rupee depreciates 5 to 8 percent then we would see fresh money from foreigners who would have already saved 15 to 20 percent return this year,” said Arslan Soomro, senior advisor at a Sweden-based investment manager Tundra Fonder.
Commodity analyst Osama Rizvi, opposing an intervention by State Bank of Pakistan (SBP) into currency market, acknowledged that rupee was overvalued. In July, current account deficit surged to a record high of $2.05 billion, but rupee was kept at around Rs106 to a dollar in the inter-bank market. The open market, however, adjusted a bit.
Soomro said worsening current account deficit has a detrimental effect on the economic well being of the country. “Sticky exports have caused a much-necessitated pressure on the currency.” SBP’s foreign exchange reserves are also declining and were reported at $14.343 billion as of August 25.
“If the government fails to enact a policy to cushion depleting reserves either through loans or a tax amnesty then we may see a massive plunge of 10 to 15 percent in the currency in a year or so,” Tundra Fonder’s executive said.
“Finance ministry should accept new reality and modify the game plan to let currency correct by 4 to 6 percent and be a spectator in the market forces.” Rizvi, however, bet on interest rate-driven recovery in foreign investment.
He said federal open market committee, which decided interest rate for dollar, might raise interest rates in the coming meeting or the next one. “That will certainly bring in some buying,” he added.
Passive inflows of around $400 to 500 million were expected following the upgrade of Pakistan Stock Exchange to emerging markets index of Morgan Stanley Capital International (MSCI), effective from June 1.
US Index provider MSCI reclassified the country as an emerging market from frontier market status and added six securities in its main board and 27 shares in small-cap index. Market capitalisation of listing companies to GDP ratio in the country is still around 35 percent as compared to more than 70 percent in other Asian markets and 100 percent or more in the developed markets, indicating a significant medium-term upside potential in the market valuations.
Analysts, however, said the market has already increased manifold during the last seven years and the past earnings growth is unlikely to be repeated in the next few years thereby, limiting chances of capital appreciation in share prices.