Index down 10pc on foreigners' selling

RECORDER REPORT

KARACHI: The offshore investors were yet again at the forefront in determining stock market direction and the KSE-100 index was down 10 percent in the second half of 2011 in the backdrop of net foreign selling worth $157 million during this period.

The market had witnessed inflow of $250 million and the index had increased by 24 percent in the corresponding period of 2010, while in the second half of 2009, the index had increased by 31 percent on the back of net foreign buying of $291 million.

The foreigners still hold 29.98 percent ($2.4 billion) of the market's free float against its recent high of 32.5 percent ($2.8 billion) on May 21, 2011.

"We believe the gloomy global economic outlook in general and the ongoing Euro debt concerns in particular have reduced the investors' appetite for equities, while enhancing the appeal for bonds in search of safe havens", Atif Zafar, an analyst at JS Global Capital, said.

Interestingly, the appetite for commodities has also faded away lately. "Take cue from gold down 16 percent from its peak on Sept 6, 2011) and CRB Index down 22 percent from its peak on April 29, 2011," he added.

Despite equities being the least preferred instrument for investors, Pakistan's equity bourse has seen a milder foreign outflow compared to emerging economies, Atif said.

He pointed out that foreign selling was not specific to Pakistan. "Selling by foreign fund managers has been seen in most equity markets", he said. "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 said.

Overall, foreign portfolio investment 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, the 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.

He was of the view that the foreigners had opted drawdown from those countries which either have high fiscal deficit (India) or higher exports to GDP ratio (South Korea, Thailand, Taiwan, Japan etc).

"We believe during the past few months, foreigner's uneasiness on Pakistan has also increased due to strained US-Pak ties, domestic political uncertainty, question mark on macro-economic indicators and energy shortfall", he said.

Interestingly, Indonesia and Philippines managed to attract foreign flows during the period under review. The two markets witnessed an increase of 25 percent and 8 percent on year-on-year basis in foreign buying in 2011 year-to-date (YTD). The higher confidence in the two countries was mainly on the back of high growth prospects, and relatively lower fiscal vulnerability and political stability, Atif said.

About the future outlook, he said "The important question that we are fielding 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 the KSE has rebounded sharply in the year following a decline." However, clarity on the domestic political front and issues related to capital gain tax would be the main triggers in the days to follow, he added.

The KSE trades at an FY12E PE of 6.0x and offers an impressive earnings yield of 17 percent.