The continuous foreign corporate selling has been affecting share prices and stock market sentiments in Pakistan.
Topline Securities, a brokerage house in Pakistan, released a report “Pakistan Strategy: Foreign selling at PSX; Will this trend continue in 2021?”
The report states that during the past six years, total net foreign selling has been recorded at US$2.1 billion, which is 15 percent of the market’s free-float capitalization. In 2020 alone, net foreign corporate selling has clocked in at US$ 529 million till Dec 18, 2020 (Total net foreign selling: US$504 million).
Similar selling has also been witnessed in other Frontier Markets and small Emerging Markets like Malaysia, Vietnam, and Sri Lanka.
Stocks with high FPI have largely underperformed
The stocks having high foreign portfolio investments (FPI) have largely been underperformers at the Pakistan Stock Exchange (PSX) in the last few years, said the report.
Lower net selling likely in 2021
The quantum of foreign flows would be a key factor in setting the direction of the market in 2021 as the brokerage house has seen shares owned by foreigners underperforming due to their rising float in the market.
According to SBP data, FPI stands at US$ 3.0 billion (high of US$ 8.4 billion on May 26, 2017, and a low of US$ 1.0 billion on Mar 14, 2009).
However, according to Topline’s analysis, the data also includes a few strategic holdings of sponsors (ranges between US$ 0.5-1.0 billion).
This US$ 2 billion, which is 4 percent of market capitalization and 13 percent of free-float capitalization, includes both passive and active foreign funds. So, theoretically in a worst-case scenario, foreign selling of US$ 2 billion can come into the market, added the report.
The report suggests that 20-25 percent of the US$ 2 billion are illiquid stocks like Nestle Pakistan (NESTLE), Colgate Palmolive (COLG), Pakistan Tobacco (PAKT), Murree Brewery (MUREB), etc. These illiquid shares may be privately placed and not directly affect local liquidity.
Therefore, adjusting for this, selling of around US$ 1.5 billion can come into the market, it added. Topline does not expect this US$ 1.0-1.5 billion selling to materialize in 2021, as there are many long term investors.
They expect lesser US$ 200-300 million net foreign selling during the year, where the overall outlook of Emerging and Frontier Markets is also improving.
Emerging Markets (EMs) and Frontier Markets (FMs) may see inflows which may limit selling
The foreign selling in Pakistan has not just been Pakistan specific, but outflows have been witnessed in Emerging Markets (EMs) and Frontier Markets (FMs), noted the report. The EMs have underperformed the S&P 500 since 2010, and hence investing in riskier markets when the US market has delivered solid returns makes little sense, it added.
A narrow majority of market strategists surveyed by CNBC predict that US stocks would continue to rally into 2021, with the S&P 500 rising between 8 percent and 22 percent next year from their current levels.
On the other hand, some international Emerging and Frontier Markets commentators believe that risky assets may come into the limelight, given the expected pick up in economic activity post the introduction of COVID-19 vaccines.
Another factor that can help Emerging and Frontier Markets is a weaker US Dollar next year. In theory, a weak US Dollar should help drive flows into the Emerging and Frontier Markets as it supports their currencies, added the report.
Recently, there have been some inflows in Emerging Markets (e.g., India, Thailand, and Taiwan). However, Topline Securities continue to see foreign selling in Pakistan.
The report stated that many Frontier Funds tracking Pakistan have either closed down or their AUMs have come down significantly due to redemptions. Considering this, they expect lesser net selling by foreigners in 2021, and locals will continue to drive the market.