The not so ‘hot money’

Now that we have your attention, this is a discussion on foreign portfolio investments in local equity market, rather than foreign flows in government debt market.

Foreign portfolio investment in Pakistan’s equity market is rather small, and even though the benchmark Pakistan Stock Exchange (PSX) has recovered sharply since August 2019, foreign investment in local equity market remains negative (on net basis) in the year to date.

However, category-wise data reported by National Clearing Company of Pakistan (NCCPL) reveals that unlike foreign corporate and individual players, overseas Pakistanis have a more positive view on the market, even though the size of their total inflows may well be described as pittance. But this can potentially change. Here is how.

Currently, overseas Pakistanis only have two ways to invest in local equities: by opening accounts with brokerage houses, funded via accounts at local banks. Or, by opening accounts with local asset management companies (AMCs), funded via accounts at local banks.

In both cases, the prevalent mechanism assumes that all overseas Pakistanis with savings to invest in Pakistani equities frequently visit Pakistan to be able to smoothly move their investment and the return back to their country of residence, and to sort out operational issues with banks and brokerage houses/AMCs. And in the case of former, the system also assumes that overseas Pakistanis are closely following the changing trends in Pakistan’s economy, sectoral performance and the performance of individual companies. Both are rather tall assumptions.

In other words, currently, Pakistani expatriates have no mechanism to invest in local equities (or even fixed income or money market), unless they travel to Pakistan and physically open an account here in Pak rupees. This must change. In order to allow overseas Pakistanis to invest directly into their preferred AMCs, the State Bank needs to connect local AMCs with its SCRA platform as it has connected Pakistan Stock Exchange with that platform for direct investment in equities.

When interest rates come down, there would be some outflow from the so-called hot money invested in government debt market. Even if the size of that outflow is small or manageable in relative terms, it would be prudent to attract non-debt creating foreign inflows in the equity market once earnings differential between local bonds and equities starts favoring the latter.

Linking AMCs with the SCRA platform will also allow overseas Pakistanis to access local fixed income and money market as well at a time when there are not many lucrative saving opportunities in the developed world.

BR Research is told that even though the central bank is cognizant of the need, it has not moved swiftly in this direction. Perhaps because the SECP – the securities regulator - and MUFAP – the AMCs association – have not made the issue as their top agenda item.

If the PM wants to lure expatriates to invest in the country, then this should be on his agenda. Must it be so that Pakistani expatriates set up new businesses in the country? Why shouldn’t they be given the option to invest through professional investments managers sitting at the AMCs?

Since the AMCs have not really expanded their network within the country nor conducted successful marketing campaigns abroad, it may be difficult to imagine the gains resulting from a link between the SCRA and the AMCs. But far more overseas Pakistanis could have invested in both fixed income funds – and in equities when benchmark PSX bottomed out in August 2019.

This may seem counter factual. But here is the thing: the maxim, ‘when opportunity knocks at the door, open it,’ should not be the guiding light in policymaking, because there is no reason to keep the door closed. Opportunity should be allowed to just walk in without knocking.