Even though Pakistan was reclassified from a frontier to an emerging market by MSCI in 2017, meaningful institutional flows have yet to materialise. This inactivity has not been helped by the volatility in the local market. For instance, Pakistan was one of the best performing emerging equity markets in Asia in 2016, but has delivered very little since, with the MSCI Pakistan Index dropping by 28% in 2017 and falling a further 37.8% in 2018.
Despite these challenges, experts believe Pakistan’s long-term potential is quite promising, particularly with confirmation of a long-anticipated $6 billion loan from the IMF.
“Pakistan has gone through a prolonged period of change since 2018 with the local equity market being weighed down by elections, macroeconomic headwinds and global emerging market developments,” said Hammad Izz-Hamid, head of securities services, Pakistan at Deutsche Bank. “While the market continues to attract investor interest, international portfolio investors have been sitting on the fence. However, the investment climate is set to rebound over time in view of a structural reform-oriented government agenda, ongoing stabilisation in economic fundamentals, and Pakistan’s relative discount to emerging markets.”
Pakistan has helped its cause by implementing a series of impressive structural reforms since the market opened to international investors back in 1991. Pakistan’s market infrastructures, for example, follow international best practices, evidenced by the existence of a demutualised and integrated stock exchange, along with an established CCP (central counterparty clearing house) servicing both on-exchange and OTC derivatives and a fully functioning CSD (central securities depository), which operates on a T+2 settlement cycle. Furthermore, the CSD and CCP are totally independent of the exchange.
Improvements are still being made at a local market level. “The Securities and Exchange Commission of Pakistan (SECP) has a robust capital market reform agenda encompassing various regulatory, operational, structural and market development initiatives to promote an orderly and efficient market,” added Izz-Hamid. “Market reforms have primarily focused on strengthening governance at the frontline regulators, system development initiatives to capitalise on technological advances, measures aimed at liquidity generation, enhanced risk management and increased investor protection.”
Most recently, the Pakistan Stock Exchange (PSX) has launched programmes explicitly designed to enhance investor protection through new broker regulations and an investor protection fund. In addition, PSX is introducing a number of new investment products including ETFs (exchange traded funds) and Shariah compliant financial instruments in what should help deepen liquidity in the country. Furthermore, local market access has been expedited following the passage of measures designed to simplify account opening documentation requirements and investor KYC (know-your-customer) obligations.
In terms of technological innovation, the country has been very proactive – particularly in streamlining corporate action processes. Meanwhile, electronic dividend and voting mechanisms have also been rolled out, under the tutelage of the SECP and Central Depository Company. A centralised e-IPO system was introduced too, enabling retail investors to submit order applications via the internet, mobiles or ATMs, said Izz-Hamid. As the country continues to implement structural reforms, investor flows could reappear.