Access to capital and a strong research base are primary advantages for total brokers

Nov 16 - 22, 1996

The Pakistan market leapt into prominence in 1991 when the government loosened foreign exchange controls and allowed foreign portfolio investment in local equities. Foreign brokerage houses took the lead in advising international portfolio managers of the opportunities and incentives available in Pakistan. With foreign funds pouring in, equity trading rose to new highs prompting many firms to set up rep offices or joint ventures in Pakistan.

Firms that have established joint ventures combine local and foreign expertise in achieving their objectives. The key benefits of a joint venture are as follows.

Foreign broker perspective

From a foreign broker's perspective, a local partner helps a) smoothen operations, b) improve the flow of information and c) identify business opportunities.

Operations: Pakistan is still a developing market where computerized trading is not fully functional, liquidity remains a concern and there is physical exchange of shares in the absence of a central depository. As a result foreign brokers have to rely heavily on local houses for carrying out transactions. In a joint venture, the two offices are able to coordinate much more efficiently which results in better execution and settlement of transactions.

Information flow: Access to information is critical for operating in any market and Pakistan is no exception. Having analysts on ground can expedite information flow and help the sales team make timely decisions. In a developing market like Pakistan, early access to accurate information opens opportunities which can lead to very high returns. Generally, experienced staff of local houses have access to information that foreign brokers do not have, or receive with delays.

Business opportunities: Origination is another area where a local office is very important. As the Pakistan market lacks depth, finding sufficient lines of stock is not always easy. Since the local sales force interacts with local institutions as well as corporates, it is in a much better position to identify such lines and generate business.

Local Broker Perspective

From the local partner's perspective, the main areas where a foreign partner can add value are a) capital b) distribution and c) research

Capital: For local brokers, one of the most important requirements for business is adequate funding. Most brokers have limited capital and operate mainly through lines of credit from banks. An injection of capital from a foreign partner can greatly decrease operating costs by reducing dependence on credit lines.

Distribution: A foreign tieup gives access to a global distribution network, which is difficult to establish as a local firm. This increases the flow of foreign funds, which not only boost revenues in an active market but also support trade volumes in times of tight local liquidity.

Research: Research quality is given a fillip by the link with a foreign brokerage house. The two way information flow helps refine locally produced research by giving it a regional and a global perspective.

The last foreign fund led rally was seen in May '96 which pushed the index up xx% to 1776. Since then, a combination of factors has kept most foreign investors shy of the market. Starting from July '96, local institutions faced with tight liquidity initiated heavy selling which prompted foreign funds to move away from the market. Local selling continued unabated until end August '96, preventing investors from reacting positively to strong half yearly results of most blue chip companies. Consequently the market continued its downward slide despite attractive valuations. The situation was further aggravated by rumours preceding the devaluation and mini budget of october 22.

Looking ahead, foreign funds are likely to keep a close watch on the macro economic outlook as well as developments on the political front. Although valuations have reached attractive levels and selected corporations' earnings are likely to remain buoyant, investors will have to be convinced of the implementation of the recently announced measures before committing funds to the market. A good cue for foreign fund managers and the market in general will be the outcome of the ongoing IMF evaluation, and to a lesser extent of the Moody's rating of the sovereign debt. A positive signal is likely to provide assurance to portfolio managers that the economy is improving which could lead to an upturn in the market.