New Emerging Market Can't Seem to Attract Foreign Investments

Pakistan, one of the newest emerging markets cannot seem to attact overseas funds. The country's stocks have been recently included in the emerging market index, however foreign capital is draining away.

The benchmark of Pakistani capital Karachi’s KSE100 Index has noted a rise of 2 percent, whereas the MSCI Emerging Markets Index has jumped 14 percent.

Moreover, foreign funds have sold a net USD 194 million this year, adding to outflows of USD 334 million in 2016.

Several factors have led to this situation. Investors are taking cover due to the halt in the privatization program, the graft probe against Prime MinisterNawaz Sharif and the prospect of a government spending spree in the run-up to elections.

Last year, KSE100 Index surged 46 percent, 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, Salter added.

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.

Following the judgement, the KSE100 Index surged more than 5 percent, 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 USD 550 million, Al Hajj said, without giving a timeframe.

Read more at Bloomberg.