KARACHI (October 29 2002) : The Karachi Stock Exchange (KSE) witnessed a decrease in outflow in foreign portfolio investment in 2001-2002 as it totalled at $8 million from $140 million in the previous year after some offshore funds sold their holdings.
Two factors were significant in widespread foreign outflow in 2000-2001, firstly foreign investors mainly Morgan Stanley Dean Witter announced the liquidation of its Pakistan Fund by end-may or June and selling by Templeton and secondly, the outflow in previous years had reduced the residual in Pakistan.
Although on yearly basis there was a net outflow, the second half of the FY02 saw an inflow of $48 million. This is in line with the bull run in the market, which started in January and continued till early May 2002. With the limited liquidity available in Pakistani market, foreign portfolio investment plays a significant role in setting the direction for the KSE-100 index.
The KSE-100 index gain resilience from the overall improvement in economic fundamentals, consequent improvement in corporate profitability prospects, and the financial market liquidity (that boosted asset prices) to overcome political concerns.
FY02 was relatively good year for the KSE with the benchmark KSE-100 index recorded a 29.5 percent rise, in sharp contrast to the 10.1 percent drop witnessed during the preceding fiscal year.
This performance, which appeared to be underpinned by a steady improvement in economic fundamentals during the course of the year, is more impressive when viewed in the context of the various economic and non-economic shocks suffered by the country as we as a number of disruptive market developments.
The badla rates, which average around 18 percent at the start of FY02, ebbed as low as 9 percent during July 2002. This can be attributed to the fact that due to fall in the rate of return on almost all assets, and the advantage that badla returns are considered as capital gains (tax exempted), more money entered the badla market causing a plunge in the cost of badla finance. Although, currently badla is an important source of financing in the equity market, there is a widely held view that badla or carry over trade encourages over leveraged trade. Thus augment systemic risk for the market.
For this reason, it is expected that in future, margin financing will replace carry over trade to reduce excessive volatility. Also with the development of futures market, investors now have a new instrument to hedge their risks. Another source of fall in badla rates may be the rise in the daily settlements from one percent to roughly 10 percent of the total trade.