Foreign investment jumps by 84%

Foreign investment jumps by 84%

Foreign portfolio investors are gradually returning to Pakistan’s debt and equity markets after a prolonged absence, marking a significant shift in market sentiment. Short-term external investment has surged by 84%, surging to a 30-month high, now standing at Rs501.30 billion. According to a weekly update from the State Bank of Pakistan (SBP), overall investment hit an all-time low, plunging to a 12-year low of Rs272.54 billion in June 2023.

The revival was particularly notable against the backdrop of the benchmark PSX KSE 100-Index, which surged to a new all-time high, surpassing the 74,000-point mark on Monday. The climb is in contrast to its position, hovering around 61,500 points in December 2023 and only 40,000 points in June 2023.

Speaking to The Express Tribune, Shahid Ali Habib, Chief Executive Officer of Arif Habib Limited (AHL), emphasized that foreign investment has turned positive after a prolonged period, attributing this shift to the $3 billion International Monetary Fund (IMF) loan program that has been finalized and continuous. discussions to get the next IMF package by June-July 2024.

He cited studies showing that the Pakistani market, particularly the Pakistan Stock Exchange (PSX), has historically provided higher investment returns during the period under the IMF program compared to those without IMF involvement over the past two to three decades.

Muhammad Sohail, Chief Executive Officer of Topline Securities, pointed out that stability in the economy and currency is attracting foreign funds into the equity and T-bill (debt) markets. He noted that investors are confident of achieving above-average returns in dollar terms by taking advantage of Pakistan’s gradual economic recovery.

Data from the SBP shows a significant increase in foreign investment in PSX shares, rising to Rs449.24 billion currently from Rs271.45 billion in June 2023. Similarly, foreign investment in other sectors has also seen a surge, rising to slightly over Rs51 billion compared to around Rs1 billion in December 2023.

For the past six consecutive years, foreigners have been disinvesting from domestic equities, resulting in a drastic reduction in their total investment, which fell significantly below $1 billion compared to the peak of $8-9 billion recorded in 2017. Likewise, foreign investment in government debt securities such as T-bills and Pakistan Investment Bonds (PIBs) have shrunk to almost negligible levels by December 2023, in contrast to the record levels of around $3.6 billion observed in early 2020.

Director of Akseer Research, Muhammad Awais Ashraf said foreigners are now positioning themselves strategically in government debt securities, supported by the stability in the rupee-dollar exchange rate, which is expected to continue in the short term. Additionally, they expect the central bank to keep its benchmark interest rate at a record high of 22% until September 2023 amid talks for a new IMF loan program, he said.

In its latest detailed review report published last week, the IMF praised the central bank’s stance in maintaining tight monetary policy, with the benchmark policy rate at 22% over the past 10 months. He underlined that the combination of a stable rupee, record interest rates, and higher investment returns in rupee-denominated T-bills, averaging around 21% per annum, have collectively attracted foreign investors to the local debt market.

Recognizing this trend, Habib AHL points out that foreign investors are increasingly investing in companies listed on the PSX, expecting that the central bank will soon start a cycle of interest rate cuts, potentially starting with the first cut in June 2024. This expectation comes after the rate inflation fell to a two-year low of 17% in April 2024.

He predicts that the inflation rate will continue to decline to 13-13.5% in May 2024, down from the multi-decade peak of 38% recorded in May 2023. He expects that the central bank will cut the policy rate cumulatively by 500-600 basis points in the year going forward, bringing it down to around 16% from the current 22%.

This expected rate cut is expected to boost the share price to its historical average, with a price-to-earnings ratio of 7-7.5 times, compared to the current forward PE of 4-4.25 times. Looking ahead, he predicts that the benchmark PSX KSE 100-Index is likely to reach around 85,000 points by the end of December 2024 and potentially surpass 105,000 points by June 2025.

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