Photographer: Asim Hafeez/Bloomberg

This New Emerging Market Can't Seem to Lure Foreign Funds

  • Foreigners have pulled $194m from Pakistan stocks this year
  • Elections in 2018 slowing reforms and economy deteriorating

As foreign funds pile into this year’s risk rally, one of the world’s newest emerging markets is missing out on the action.

Pakistan may be preparing to celebrate the imminent inclusion of its stocks in MSCI Inc.’s emerging-market index this month, yet overseas money is draining away. Foreign funds have sold a net $194 million this year, adding to outflows of $334 million in 2016. While Karachi’s benchmark KSE100 Index has risen 2 percent, the MSCI Emerging Markets Index has jumped 14 percent.

The exodus underscores how investors are taking cover as a graft probe surrounding Prime Minister Nawaz Sharif, a stalled privatization program and the prospect of a government spending spree in the run-up to elections in the middle of next year start to take the sheen off one of 2016’s best-performing stock markets. The KSE100 Index surged 46 percent last year, beating every one of its peers in Asia.

“The MSCI transition makes it harder for frontier funds to increase their allocation, while emerging-market investors have yet really to buy Pakistan,” said Daniel Salter, head of equity strategy at Renaissance Capital in London. “The pace of reform could be sluggish in the run-up to the elections” and the privatization program is on hold, he said.

While Prime Minister Sharif is being investigated for alleged corruption, Pakistan’s Supreme Court decided April 20 not to disqualify him from holding office. It ordered a further investigation of his family’s finances that’s due in 60 days from the decision.

Read more on the graft allegations against Prime Minister Sharif

The KSE100 Index surged more than 5 percent in three days following the judgment, reversing this year’s loss. The measure fell 1.2 percent at close in Karachi on Tuesday, the second biggest drop among major Asian gauges.

“Foreigners have been selling but this has been easily absorbed by mutual funds,” said Mohamad Al Hajj, an equities strategist at EFG Hermes in Dubai. Domestic investors seem to be “optimistic” following the delay of the verdict by 60 days, he said.

Inflows are likely to resume in May, with the market attracting as much as $550 million, Al Hajj said, without giving a timeframe. Mohammed Sohail, chief executive of Topline Securities Pakistan Ltd. in Karachi, is also bullish, forecasting the benchmark gauge will rise a further 15 percent by year-end. Topline favors cement and auto companies and banks, he said.

‘Somewhat Undiscovered’

For Andrew Brudenell, a fund manager at Ashmore Group Plc in London, Pakistani stocks are still “somewhat undiscovered” by emerging-market investors, which may explain the lackluster inflows.

“I think there is a lack of understanding of the quite good levels of disclosure, the quality of the management teams,” he said.

Pakistan’s economy is starting to look vulnerable though. Spending on infrastructure projects under the China Pakistan Economic Corridor is widening the current-account deficit and there’s concern Pakistan will be left with unmanageable debts, Gareth Leather, an economist at Capital Economics Ltd. in London, wrote in a note Friday. The Karachi index will rise less than 3 percent from current levels by the end of the year, Capital Economics forecast, while economic growth in the medium term will probably remain at 4 percent.

The deteriorating economic backdrop is keeping offshore investors from entering Pakistan to the same degree as other emerging markets, said Muzzamil Aslam, the Karachi-based chief executive officer at Invest & Finance Securities Ltd.

Foreigners are “not interested in Pakistan the way they used to be,” he said.

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