Gulf Investors Eye Pakistan Stock Markets
The aftermath of the U.S crackdown on the hawala system of unofficial money transfer is strongly characterized in the Middle East by the high volume of repatriation of funds back into the region. Some estimates hold that $40 billion have found their way back to the region since September 2001. So it’s no secret that investors in the region are avidly hunting for investment opportunities closer to home. And in their search for lucrative avenues to fatten their holdings, some residents of the UAE have started looking to Pakistan as a lucrative spot to nestle their cash.
For Pakistan, starved of foreign investment, that’s good news. Foreign portfolio investment has long been severely prone to flight, beleaguered by political instability and perpetual security concerns. That’s why even the tiny net inflow of $2.8 million from the UAE in the first quarter this year is something to celebrate. After all, it’s a welcome change from the drastic outflows that have wracked the country in the last two years. In the first quarter last year, there was a net outflow of foreign portfolio funds amounting to $1.6 million.
“Because money is coming back from the U.S., Middle East investors are looking at regional markets,” says Arshad Arif, head of research at Khadim Ali Shah Bukhari & Co, a brokerage firm which represents Merrill Lynch in Pakistan. “On a price-to-book value basis and a dividend yield basis, Pakistan is really attractive.”
According to data compiled by the State Bank of Pakistan, Pakistan’s bourses saw a net outflow of foreign portfolio investment of $140.4 million in 1999-2000 and to $10.1 million in 2001-02. In both those years, the net outflow of UAE foreign portfolio funds stood at $4.2 million and $10.9 million.
But now, it looks as though the tide is changing.
Analysts say the fiscal year that ends in June 2003 is likely to see a slight net inflow of foreign portfolio investment. Prior to the Oct 10 general elections, forecasts of foreign portfolio investment were as high as $300 million and up to 15 percent of that was expected to come from the UAE. But even though the Karachi stock market bounced back to strength after just a single-session post-election downturn, political uncertainty over the next quarter could temporarily dampen foreign interest. Even a slight inflow, however, will be the first time the country will see cash coming in since 1999-2000 when foreign portfolio investment was estimated at $73.5 million. But no one is predicting anything even remotely close to the heady bull days of 1994 over $1 billion in foreign money flowed into the equities market. In 1999-2000, UAE portfolio investment in Pakistan stood at $25.2 million and although analysts do not expect to see those levels just yet, they estimate that UAE inflows this year could touch the $15 million level.
Much of this is attributed to the comfort level of investing in your own backyard. “People in the Middle East know this market,” says Moin Fudda, managing director of the Karachi Stock Exchange. “Most of the investment we attract will be from the UAE but it all depends on law and order.”
Indeed security concerns have always plagued the country’s foreign investment prospects. In 2002 alone, three major incidents of violence against foreigners put a dent into the country’s chances of attracting big money. In January U.S. journalist Daniel Pearl was murdered followed by bomb explosions outside a Karachi hotel in May and outside the U.S. Consulate in July.
Market watchers say its largely non-resident Pakistanis (NRPs) in the UAE that have plumped up the foreign investment statistics. “They may not be millionaires but they do have surplus investable cash,” says Ali Ansari, chief executive of AKD Securities, a local brokerage house. **“For local UAE investors Pakistan is a bit of a Jeckle and Hyde situation because it’s perceived to be extremely dangerous and linked to Al-Qaeda.” **
But experts say that in recent months even UAE investors have starting succumbing to Pakistan’s enticing returns.
“You just can’t get these returns elsewhere,” says Arif Habib, a broker at the Karachi Stock Exchange. “In the Gulf investors get a 2% dollar return and a 5-6% return on Dirhams so these returns are very attractive.” Dividend yields on Pakistan stocks range from 11% to 30%.
And brokers intend to make that known so that they can cash in on the glitzy returns. In January, a small group of about seven brokers and bankers, including Habib and Ansari, made a marketing trip out to the Middle East and made presentations to two groups of potential NRP investors in Jeddah and Dubai. As a result, they managed to book a handful of accounts and some of the inflow from that region is credited to that trip.
Of course the first quarter trickle form UAE investors is just a drop in the bucket compared to the cash that’s been pumped into the Karachi stock market by local institutions and retail investors. And analysts say many UAE investors may now be regretting their trepidation. After all, Pakistan’s stock market surprised even the most hawkish market gurus this year by emerging as the world’s best performing bourse. The KSE-100 index has rallied 70% in the last 12 months, climbing to 2,118.56 on Monday.
And brokers say the market’s winning streak is far from over. Although the political uncertainty could exert some pressure on the market, the index is expected to continue to claw its way upward with some analysts pegging the market at 2,500 points by June 2003. And that, they say, means it may not be too late and investors from the UAE can still find strong value in volume leader stocks like Hub Power Company, Pakistan State Oil, and Pakistan Telecommunications Company Limited and net a return of 25% combining both dividend yields and capital gains.