December 22, 2020 (MLN): Foreign corporate investors in Pakistan have been on a ceaseless selling streak for the past six years which has affected share prices and stock market sentiments in Pakistan.
According to the report by Topline Securities, the total foreign selling during the past six years has been recorded at USD 2.1 billion which is 15% of the market’s free float capitalization.
In 2020 alone, net foreign corporate selling has clocked in at USD 529 million till Dec 18,2020 (total net foreign selling: US$504mn).
Going by the report, this continuous selling follows foreign buying that came in on two major accounts in 2014/15 and 2017. First is Secondary Public Offerings (SPO) by the government in 2014/15 in which UBL and HBL attracted strong foreign flows of more than USD 1 billion, where UBL saw foreign investment of around USD 310 million (81% of the offer) and HBL received foreign investment of approx. USD 750 million which was 75% of the offer. The second factor that triggered foreign buying was the upgradation of Pakistan to MSCI Emerging Markets as on the MSCI rebalancing day i.e. May 31, 2017, gross foreign buying of USD 452 million was recorded.
The data gathered by the Brokerage house revealed that in last few years, the stocks or sectors having high foreign portfolio investments (FPI) have largely been underperformers at the Pakistan Stock Exchange (PSX). The scrips of HBL, MCB and UBL under the Banking sector and stocks of OGDC and PPL under the Oil and Gas head continued to flounder in past few years as these stocks hold high foreign investments in their portfolios.
Meanwhile, it is important to note that this foreign sell-off is not Pakistan-specific. Similar selling has also been witnessed in other Frontier Markets (FM) and Emerging Markets (EM) like Malaysia, Vietnam and Sri Lanka.
The report highlights that EMs have underperformed the S&P 500 since 2010, and hence investing in riskier markets when US market has delivered solid returns makes little sense. Furthermore, a narrow majority of market strategists surveyed by CNBC predict that US stocks will continue to rally into 2021, with the S&P 500 rising between 8% and 22% next year from their current levels.
On the other hand, some international Emerging and FMs commentators believe that risky assets may come into limelight given expected pick-up in economic activity post the introduction of COVID-19 vaccines. Another factor that can help Emerging and Frontier Markets is a weaker US Dollar next year. In theory, a weak US Dollar should help drive flows into the Emerging and Frontier Markets as it supports their currencies. In addition to this, recently, there have been some inflows in Emerging Markets (e.g. India, Thailand and Taiwan), the report said.
On the domestic front, the direction of the market in 2021 will depend upon the quantum of foreign flows as we have witnessed above that shares owned by foreigners are underperforming due to their rising float in the market.
The report further highlighted SBP data, as per which, FPI stands at USD3.0 billion (high of USD 8.4 billion on May 26, 2017 and low of USD 1.0 billion on Mar 14, 2009). As per the report, this SBP figure also includes few strategic holdings of sponsors (ranges between USD 0.5-1.0 billion), Therefore, after subtracting around USD 1 billion from USD 3 billion, the resulting figure of USD 2 billion represents 4% of market capitalization and 13% of free float capitalization which includes both passive and active foreign funds. This suggests that in a worst-case scenario, foreign selling of USD 2 billion can came into market.
Moreover, the report also underlined that around 20-25% of the USD2 billion are illiquid stocks like Nestle Pakistan (NESTLE), Colgate Palmolive (COLG), Pakistan Tobacco (PAKT), Murree Brewery (MUREB) etc. which may be placed privately and not directly affect local liquidity. Thus, after adjusting for this, selling of around USD1.5 billion can come into the market, which is unlikely to materialize in 2021 as there are many long-term investors.
In conclusion, as the overall outlook of the Emerging markets and Frontier markets are improving, the lesser net foreign selling is expected in the year to come.
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