KSE in bid to stimulate Chinese portfolio investment

By Kazim Alam, The Express Tribune

KARACHI: The neatly printed primer on Pakistan’s economy and capital markets that AKD Securities CEO Muhammad Farid Alam took to Shanghai for potential Chinese investors early this month said “A journey of a thousand miles begins with a single step” in Mandarin on its front page.

Indeed, his visit along with Karachi Stock Exchange (KSE) officials to the Shanghai Stock Exchange (SSE) was the first step in Pakistan’s bid to increase China’s share in its foreign portfolio investment.

“With its financial services undergoing reforms, China is likely to become a strong source of future foreign investment in Pakistan,” Alam told The Express Tribune in an interview. “We met 44 Chinese fund managers and introduced them to Pakistan’s investment opportunities. The initial response is positive,” he says.

A comparison of the SSE and the KSE reveals that while the former is over 56 times larger than the latter, with a market capitalisation of $2.426 trillion, the KSE offers incredibly higher returns. According to Bloomberg and AKD Research, the calendar year to date (CYTD) return on the KSE is 47% as opposed to SSE’s -1%. Similarly, the three-year average return for the Karachi bourse is 26% compared to -34% on the SSE.

The Pakistani delegation held the first Investor Conference and Pakistan Equity Road Show in Shanghai with Chinese institutions that have the Qualified Domestic Institutional Investor (QDII) status, which allows them to invest a percentage of their assets under management (AUM) in foreign markets.

“We’re aiming for Pakistani asset management companies (AMCs) to invest in China and Chinese AMCs to invest in Pakistan. China’s financial services are undergoing reforms aimed at facilitating the flow of funds to and from China,” Alam says.

He adds that these reforms include increasing the access of global brokers to act as custodians, supporting domestic institutions to make cross-border investments as well as increasing limits of Qualified Foreign Institutional Investors (QFII) investment in China by removing a ceiling on investments by overseas sovereign wealth funds and central banks.

QDII status was given to China’s domestic asset managers as part of reforms undertaken in 2005. However, foreign investments as a percentage of AUM have remained minimal to date, with strong Chinese export growth underpinning yuan’s strength, according to Alam.

“As global imbalances manifesting in current account surpluses and deficits narrow, Chinese asset managers are getting increasingly interested in emerging and frontier markets for higher asset allocations,” he says.

Alam notes that Pakistan’s near 50% CYTD return with high dividend yield is leading Chinese asset managers to take a closer look at Pakistan. Additionally, the relative ease of access available to foreign capital in Pakistan should underpin strong foreign institutional portfolio investment (FIPI) from China, he observes.

Although the KSE has been one of the best performing stock exchanges of the world in the current calendar year, the market capitalisation to gross domestic product (GDP) ratio is still 21%, which is low compared to SSE’s 34%.

“While the benchmark KSE-100 index is at its highest level, average daily volumes are still 27% below the levels of calendar years 2006 and 2007,” Alam notes, hoping Chinese investors will take maximum advantage of investment opportunities in Pakistani capital markets.

Published in The Express Tribune, December 28, 2012.  

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