Foreign funds return to Pakistan as stock market rally continues

International investors are renewing their interest in Pakistan’s stock market, as the country’s equities delivered one of the world’s best returns in 2024 and are set to do it again this year, according to a Bloomberg report.

Major asset managers, including BlackRock Inc. and Eaton Vance Corp, have reentered the $50 billion market, which surged 84% last year. Analysts anticipate further growth, with Intermarket Securities Ltd. projecting an additional 40% gain in the benchmark KSE-100 Index this year.

“You don’t have to stretch your imagination to make an investment case for Pakistan,” Steven Quattry, portfolio manager at Morgan Stanley Investment Management Inc., told Bloomberg. He attributed the rally to strong earnings growth and stabilizing economic conditions.

Pakistan’s stock market gains have been fueled by an improving economic outlook, inflationary easing, and crucial International Monetary Fund (IMF) loan agreements. A narrowing current account deficit and stabilizing foreign exchange reserves have bolstered investor confidence.

The State Bank of Pakistan’s recent rate cut further reinforced optimism, providing additional support for equities.

Foreign investors are responding to these positive developments, with Pakistan’s weighting in the BlackRock Frontiers Investment Trust rising to 5% in December, marking its first return since March 2022. Eaton Vance also reentered the market in mid-2024 after a brief exit.

Other asset managers, including Legal & General Investment Management Ltd. and Evli Fund Management Co., have also increased their holdings, according to Bloomberg data.

Foreign investor participation is reaching levels last seen between 2014 and 2018, said Mohammed Sohail, CEO of Topline Securities Ltd.

Despite the optimism, risks, such as political instability due to mass protests, remain.

Economic hurdles also persist. Pakistan missed its six-month tax collection target by 6%, a key requirement for the $7 billion IMF loan program, fueling doubts about its ability to secure future funding tranches.

Additionally, FTSE Russell’s downgrade of Pakistan to frontier market status in September negatively impacted sentiment, prompting foreign investors to turn net sellers in the final quarter of 2024.

Despite these challenges, analysts remain bullish on Pakistan’s long-term prospects. The country’s foreign exchange reserves now cover over two months of imports, a marked improvement from less than a month’s coverage before the IMF bailout in 2023.

“If Pakistan can manage its current account deficit—which they should be able to—we can see a multi-year rally in the market,” said Ruchir Desai, fund manager at Asia Frontier Capital Ltd. in Hong Kong, told Bloomberg.