Foreign investors at KSE have yet again been at the forefront in determining market direction. KSE-100 index is down 10 per cent in 2H2011 in the backdrop of net foreign selling worth $157 million during the period. Recall that in 2H2009, KSE-100 had gained 31 per cent on the back of net foreign buying of $291 million.
According to our estimates, foreigners still hold 29.98 per cent ($2.4 billion) of the market’s free float versus its recent high of 32.5per cent ($2.8 billion) on May 21, 2011, said Atif Zafar at JS, adding that we believe the gloomy global economic outlook (in general) and the ongoing Euro debt concerns (in particular) have reduced investors’ appetite for equities, while enhancing the appeal for bonds in search of safe havens. Interestingly, the appetite for commodities has also faded away lately; take cue from gold (down 16 per cent from its peak on Sept 6, 2011) and CRB Index (down 22 per cent from its peak on April 29, 2011). Despite equities being the least preferred instrument for investors, Pak equity bourse has seen a milder foreign outflow compared to emerging economies.
Is foreign selling specific to Pakistan? No! Selling by foreign fund mangers has been seen in most equity markets. We believe rising risk premia on equities owing to gloomy world economic outlook has led to rebalancing of their funds towards fixed income securities, he added. Overall, foreign portfolio investment has witnessed a drawdown from emerging economies during 2011 like India (-$538 million), South Korea (-$8.9 billion), Taiwan (-$9.8 billion) and Thailand (-$427 million).
Interestingly, frontier markets like Dubai ($38.4 million), Abu Dhabi (-$85.1 million) and Qatar ($756 million) are yet to witness such large quantum of selling. We believe, foreigners have opted to drawdown from those countries which either have high fiscal deficit (India) or higher exports to GDP ratio (South Korea, Thailand, Taiwan, Japan etc), he added.
Volatile news flows from Pak hasn’t helped either: He believes that during the past few months, foreigner’s uneasiness on Pakistan has also increased due to strained US-Pak ties, domestic political uncertainty, question marks over macro-economic indicators, and energy shortfall.
Markets which have attracted foreign investments: Interestingly, Indonesia and Philippines have managed to attract foreign flows during the period under review. The two markets have witnessed an increase of 25 per cent YoY and eight per cent YoY in foreign buying in 2011 YTD. The higher confidence in the two countries is mainly on the back of high growth prospects, relatively lower fiscal vulnerability, and political stability.
Outlook: Recovery in 2012? The important question these days is whether there is more downside risk to the market? We believe it is hard to predict the exact bottom of the market but looking back in history, since 1996 we have seen that KSE has rebounded sharply in the year following a decline, he added. However, clarity on the domestic political front and issues related to capital gain tax will be the main triggers in the days to follow. KSE trades at an FY12E PE of 6.0x and offers an impressive earnings yield of 17 per cent.