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Decline in Foreign Investment
Foreign investors’ stakes in companies listed on the Pakistan Stock Exchange (PSX) have plummeted to a historic low of 3.7% ($491 million) of the total value of publicly traded shares by the end of June 2024. This marks a significant decrease from 28.7% ($2.97 billion) in FY17. The decline has been attributed to economic and political instability, as well as high volatility in the rupee-dollar exchange rate.
Recent Investment Trends
Despite the overall decline, foreign investors injected $141 million into the PSX in FY24. This increase came amidst signs of political stability, early economic recovery, and a stable rupee-dollar exchange rate following the successful completion of a $3 billion IMF loan programme and a new $7 billion bailout package.
PSX Performance
The PSX emerged as the world’s best-performing stock market in FY24, with the index soaring 89% in rupee terms (94% in US dollar terms) to close at 78,445 points. The index peaked at an intraday high of 81,940 points in mid-July. Despite the strong performance, the PSX continues to trade at an attractive price-to-earnings (PE) ratio of 4.1 times, offering significant discounts compared to its peers and high dividend yields.
Historical Context and Market Dynamics
Following its transition from an MSCI Emerging Market to a Frontier Market in 2009, the PSX saw significant foreign investment, with $573 million inflows in FY10 and a total of $1.72 billion over the next six years. However, foreign outflows amounting to $2.27 billion were observed from FY16 to FY22, particularly affecting sectors such as banking and cement.
Local Market Activity
Local market activity in FY24 was led by insurance companies, with State Life Insurance being the largest net buyer, investing Rs40 billion ($142 million). This increased its market stake to 6.2% of the free-float market compared to 4.2% in 2017. Other local market participants, including banks and development financial institutions, were net sellers, offloading $141 million and $60 million worth of shares respectively.
Future Outlook
Analysts anticipate a potential surge in foreign investment in the coming years, supported by the new IMF programme. A shift of 1% from fixed income to equities by mutual funds and insurance companies (excluding State Life) could generate significant inflows into the market. The PSX’s attractiveness and investor confidence are expected to be bolstered by ongoing economic reforms and international financial support.
