Foreign portfolio investors recorded a net selling of $35 million at the Pakistan Stock Exchange (PSX) throughout January 2024, marking the highest level of selling by foreigners in a year, as reported by Topline Securities.

This surge in selling follows a period of renewed interest from foreign portfolio investors in the aftermath of the IMF deal in June 2023. Between July and December 2023, foreign corporates had bought shares worth $239 million and sold $164 million at the PSX, resulting in a net buying of $75 million.

The turnaround to net buying in 2023 by foreign corporates came after a three-year hiatus, with the PSX experiencing its highest inflows in eight years. Factors contributing to this influx include the IMF loan, stability in the Pakistani rupee, and stringent measures implemented by the caretaker government.

However, the recent spike in selling during January 2024, particularly amidst expectations of a pre-election rally, has raised concerns among investors. Notably, the leading global ETF has been a significant seller in the market.

On January 19, 2024, Global X ETFs, a New York-based provider of exchange-traded funds, announced the planned liquidation of 19 ETFs, including the Pakistan ETF, as part of an ongoing review process to align with client needs. The Pakistan ETF, which held $33.23 million in investments at the end of December 2023, saw its holdings drop to $2.3 million by January 30, 2024.

This reduction in the ETF’s size has constituted a substantial portion of the recent foreign corporate selling observed at the PSX. Analysts anticipate a recovery in PSX following this selling pressure in 2024, with expectations for the benchmark KSE-100 total return index to reach 75,000 by December.

However, analysts caution that this projection is contingent upon current low PE multiples and does not account for potential re-rating amid concerns regarding debt sustainability. Additionally, historical trends suggest the possibility of a post-election rally.

Key drivers for equities in 2024 include the smooth transition of power to a new government after elections, a new long-term funding program from the IMF, and anticipated declines in interest rates. Despite these factors, Pakistan’s market is currently trading at a PE ratio of 3.7x based on estimated 2024 earnings, significantly lower than the five-year and ten-year averages of 6x and 8x, respectively, and even lower than countries that have defaulted on external debt.