Foreigners’ growing leverage in key, lucrative market segment
THE septuagenarian Dr Joseph Mark Mobius (born August 17, 1936), the global investor and emerging markets fund manager, is thought to be all-time best investment guru, second only to the legendary Warren Buffett of Berkshire Hathaway.
Dr Mobius, at the ripe old age of 77, still enjoys strong leverage in key segment of many emerging markets including Pakistan.
It would be fair to question Mobius’ influence on the Pakistan market and this scribe would try to make sense of it all. The stock that commands the heaviest weight in the KSE-100 index is Oil & Gas Development Company (OGDC). With market capitalisation of overwhelming Rs8.4 billion, OGDC has more than 15 per cent weightage in the index, which means the rise or fall of a single rupee in the price of its stock accordingly results in addition or deduction of 15 points from the index.
The share in OGDC therefore, in great measure, commands the power to set the direction of trading at the stock market on any particular day. The share of the par value of Rs10 in OGDC is currently trading at its all-time high price of Rs216.
The heavy-weight E&P company, boasts free-float (shares available for trading) of Rs1.3bn. Franklin Resources, an American holding company which, together with its subsidiaries, is referred to as Franklin Templeton Investments, has mopped up as much as 60 per cent or $1.1 billion of the free-float in OGDC.
Dr Mobius is the President of Franklin Templeton, which position he holds since 1987. So if Mobius were to decide to pull out of the Pakistani equity market, it would trigger sell in the heavyweight stock, which, due to its domino effect, has the potential of pulling the entire market down to the bottom of the sea.
And to add to it, Franklin Resources also holds 15 per cent or $325 million worth free-float in top tier MCB Bank, the fourth biggest stock on KSE in terms of market capitalisation. MCB has eight per cent weightage in the index. Incidentally, the top three foreigners’ favourite stocks (OGDC, MCB and PPL) account for more than half of overseas investors’ stake in Pakistan bourses. According to the SBP data, foreigners own $3.2billion of Pakistani stocks (not including their stake in foreign’ sponsored companies).
The influence of foreign investors in the local capital markets is surely on the rise as 30 per cent of the aggregate market free-float is currently owned by overseas fund managers and high net worth individual, which is at its historic high. The market capitalisation of Karachi stock market has peaked to $44.8 billion of which free float is believed to be worth $11 billion.
While other foreign funds such as Lazard Asset Management; Invesco Ltd; Goldman Sachs Asset Management and Mackenzie Financial Corporation also has substantial stake in large Pakistani stocks, Franklin Templeton towers above them all.
Most market participants and analysts admitted that Dr Mark Mobius can sink the market, if he were to head to the exit door, yet they mused that such an eventuality was unlikely to happen.
A local fund manager pointed out that the Pakistani market had delivered a 10-year Collective Annual Growth Rate (CAGR) of a mouth-watering 20 per cent, making it one of the best asset class in Pakistan. Even adjusting for currency depreciation vs. the dollar, the Pakistani market has delivered 10-year CAGR at 17 per cent, which is way ahead of returns provided by most global markets.
And the icing on the cake is the robust growth in corporate profitability, which represented 33 per cent upsurge in the second quarter of FY2012, over the same time last year.
“Besides the better returns offered by Pakistani equities, consider that Templeton started accumulating OGDC in 2008-09, when the stock was priced in the range of Rs60 to Rs180, which means the average price for the Fund works out at Rs120”, says Hamad Aslam, Head of Research at Lakson Investments.
He observes that the OGDC earnings have jumped by 100 per cent since then.
Franklin Templeton, being one of the world’s largest fund is a perpetual investor and unlike the local participants, big foreign funds rarely act like a panic prone herd. “It is very unlikely that Templeton would let go its profitable stake in Pakistan’s biggest oil & gas company, when Dr Mobius has several times advocated enormous potential in emerging markets’ energy sector”, says Hamad, his statement corroborated by other analysts and corporate investment strategists.
According to the calculations by brokerage Topline Securities, the dozen scrips that seize much of the foreigners’ interest include MCB Bank of which 41 per cent free-float is held by them. Other stocks in which foreign funds have large holdings include PPL (46 pc of free-float), Unilever (59 pc), UBL (49 pc ), FFC (14 pc), Hub Power Company (14 pc ), POL (19 pc) Lucky Cement (34 pc), Nestle (55 pc), NBP (25 pc) and Engro Corporation (25 pc).
In order to secure ease of entry and exit, foreigners prefer stocks with large market capitalisation and decent liquidity and float. The spectacular rise in the KSE-100 index to 17,800 points in the last 13 months is subscribed in big measure by the local institutional and individual investors. They have, however, taken heart and are encouraged by the foreign investors’ sustained interest in the Pakistani equity market.
Including the net buy of $4.09 million worth stocks on Thursday, purchases by overseas investors in the first 15 days of the current month, stands at the tall order of $10.71 million. This is in addition to the last month’s foreign inflows amounting to $15.42 million.
According to sources familiar with the foreign portfolio investments into the Pakistani equity market, the flows primarily originate from the US, UK and South East Asia.
Yet new Funds are coming up from diverse locations, two of which include: Tundra Pakistanfond and the FMG New Frontiers Fund. In regard to the first it is learnt that Sweden’s Tundra Fonder AB launched Tundra Pakistan Fund in October 2011 based on its belief that Pakistan has “young, fast growing population, skilled executives and some of the most exciting and cheap companies”.
The second, FMG is planning to launch its New Frontiers Fund this month from its Malta arm. The Fund is representative of the increasing international interest in frontier markets which provide a potentially higher return as compared to developed and emerging markets.