Foreign private sector invested $820.7 million in Pakistan in the nine months ending March 2013. That’s a decent jump of 60 percent over the same period of last year. The devil, however, lies in the details.
Data released by the State Bank of Pakistan show the growth in foreign private investment (FPI) is actually led by growth in portfolio investment – predominantly in the equities market. Year-on-year growth in Foreign Direct Investment (FDI) stood at a mere 3.9 percent in the nine-month period, whereas that in portfolio segment was at a whopping 339 percent.
The answer lies in excellent performance at the Karachi Stock Exchange. While KSE equities had started rising in January 2012, the major upward thrust came just before the beginning of the current fiscal year. And ever since then, they have continued to attract attention, with the benchmark index rising 31 percent in the 9MFY13 period.
Despite such a performance, the country’s equity market still has plenty of room, according to Nauman Khan at brokerage Topline Securities. KSE equities are currently trading at 2013 PE of 7.3x, which “compares favourably with last 10 years’ average PE of 8.5 xs”, Khan wrote in a report published yesterday.
The report also pointed out that Pakistani market stands out as most attractive amongst its frontier market peers – both in terms of lowest price-to-earning ratio and highest dividend yield expectations. Little wonder then that foreign investors are thronging the KSE counters.
Increasing interest in Pakistani securities has raised the importance of portfolio investments even more. Portfolio investments accounted for 24 percent of total FPI in 9MFY13. The last time portfolio investments held this much weight in total FPI was in FY07, when it held 26 percent weight in the FPI pie.
But there is a multibillion dollar difference between then and now.
According to SBP data, total FPI in FY07 was $6.9 billion, of which $1.8 billion was portfolio, while the rest was FDI. In 9MFY13, total FPI was $820, of which $198 million was portfolio, with the rest being direct investments. Full year (FY13) FPI numbers can only be expected to improve marginally – at the most managing just a little above the $1 billion mark.
Note a key difference: $1.8 billion in FY07 when benchmark KSE rose by 38 percent - versus - $198 million in 9MFY13 when the benchmark rose by 31 percent. Portfolio investment in Pakistan, as a percentage of regional portfolio inflows, has also been declining for the past few years.
The bottom-line is: while portfolio investment inflows may be rising, it is still far cry from being a healthy source of attracting dollars in the economy. And, when portfolio investors – who are essentially easy-come-easy-go investors, are not putting as much money in Pakistan despite stellar stock performance, then one can hardly blame the FDI investors.