Pakistani investors have plenty of choice when it comes to the range of mutual funds in Pakistan available to them through the country’s major online investment platforms. Mutual funds that invest in domestic, regional and global equities markets, or various combinations of geographies, are available. Most investment platforms and stock brokers offer a good range of mutual funds to choose from and a full list of the funds offered by Pakistani asset managers, along with performance data, can be found on the website of the Mutual Funds Association of Pakistan.
Over the last five years the Karachi Stock Exchange 100 Index, comprised of Pakistan’s 100 largest publically listed companies by market capitalisation has returned over 80%. The exchange’s all-share index has seen similar growth. Over the same period, the S&P 500 has returned just under 50%. That’s despite the fact that the benchmark US indices have been on a well-documented bull run over that period, with last year in particular seeing new record highs being set at an unprecedented rate as equities soared.
Over 10 years, Pakistani equities have performed even better, with an average annual return of over 25%. Samiullah Tariq, director research and business development at asset manager Arif Habib Ltd, provided Dawn with data showing that over 17 years Pakistani stocks delivered average real returns of 20.6%, taking into consideration average inflation of 7.75% over the same period.
Pakistan-Focused Mutual Funds
There are now well over 200 Pakistan-focused mutual funds. These include Shariah-compliant (equity and money market), fixed income, aggressive fixed income, index tracker funds, general pension fund, frequent payout funds and capital protected funds.
Within the context of very strong average annual returns from Pakistani equities over 2 decades, while past performance is of course no guarantee to future returns, Pakistani investors may well see mutual fund investments that focus exposure on domestic equities as a strong option. They have performed better than those that invest in developed international markets like the USA. However, would they be right?
Pakistan and Emerging Equities Markets
Pakistan’s equities market has had a rollercoaster last 12 months. First the KSE 100 plummeted over 30% between late May and December 2017. The market then recovered almost 20% between the end of last year and April 2018. Emerging markets have had a good 2018 and emerging markets equity funds have seen record breaking inflows of $44.5 billion in capital by mid-March.
International investors remain optimistic about the global economic growth trajectory, with emerging markets the engine. 2018 has seen capital inflows to emerging markets almost double the previous first quarter record set in 2012 and while there are several months to go it’s almost certain the full year record of $97.5 billion set in 2010 will fall.
Cameron Brandt, director of research at EPFR, the fund flows and asset allocation data provider, was quoted in a recent Financial Times article as forecasting current enthusiasm for emerging market equities means investors will be drawn to “niche frontier markets such as Pakistan”.
However, the analyst consensus forecast of Trading Economics is for the Karachi Stock Exchange to drop by as much as 35% from current levels over the next 2 years. The USA’s current protectionist approach to trade is expected to have a negative impact on emerging Asian markets over the coming period. The IMF also forecast early this month that Pakistan’s economic growth would slow to 4.6% in 2019 from 5.6% this year. Upcoming elections and a challenging political environment are expected to slow the reform process, placing Pakistan in the IMF’s countries that it expects to demonstrate “delays in implementation or completion of structural reforms and political and policy uncertainty”. Ratings agency Moody’s also assessed Pakistan’s economy as ‘weakening’ in February this year.
Despite near term risk, the longer term outlook for Pakistan’s equity market is strong. The fact that Asia, and particularly ‘frontier Asia’ economies such as Pakistan are the least financially integrated and developed major economic regions in the world. That leaves plenty of room for growth. The Business Times sees Asia’s equity market capitalisation doubling over the next decade and generating 56% of global market cap growth over the same period. That compares to estimated 29% and 11% from North America and the EU. That level of growth would mean Asia overtaking North America as the biggest equity market region in the world.
Of course, even if that forecast proves to be accurate, growth levels are likely to vary significantly between Asian countries, with China dominating. However, there would be expected to be a positive trend for most of the region. If there is general trend towards improving political and economic stability and reform in Pakistan over the next 10 years, strong stock market growth would be almost a given. However, it has to be accepted that there is a reasonably high risk of that not being the case.
Within that context, investors would be wise to diversify risk out of Pakistan by investing in a range of mutual funds with different geographical exposures. Those that focus on Pakistan’s domestic equities market can be strongly considered for the smaller high risk to high reward ratio allocation of a diversified investment portfolio. Capital allocated to Pakistani equities should also be considered a long term investment as shorter term volatility is likely to remain a quality inherent to the domestic market for the foreseeable future. The rest can be made up of mutual funds that focus on more developed markets such as North America, Europe and developed Asian markets such as Japan and Hong Kong.
This approach to mutual funds investment will provide investors with the strong gains the potential of upside to Pakistani equities offers, without taking on an unwise level of risk that would prove very damaging in the downside scenario.
Mawazna.com is a leading financial services aggregator platform that enables you to make more informed decisions. You can have a detailed review of various mutual funds being offered by leading asset management companies in Pakistan through Mawazna.com.