AROOJ ASGHAR (Arooj.asghar@crosby.com)
Nov 26 - Dec 02, 2007

Mutual funds are becoming more attractive and popular vehicles of securities investments among the general public worldwide. This trend is highly pronounced in the developed securities market of the United States of America and Europe. However, the developing economies including Pakistan are no exception to this global trend. Because mutual funds offer the advantages of diversification and professional management, they are an ideal tool for individuals to participate in stock and bond markets. As a matter of fact, most people are not familiar with the technicalities of stock exchange and prefer to put their money somewhere and let that institution handle their money. In order to do this, they usually contact mutual funds which pool their money with that collected from hundreds or thousands of like-minded investors and thereafter invests those funds on behalf of those investors.

During the last few years, Pakistan's economy has grown impressively at an average growth rate of around 7%. Pakistan's stock market also followed the same trend and reached new highs in recent past while become one of the highest return providers in the world. On non-economic front, in parallel, during the last five years or so, Pakistan has passed through many different phases. The national (political uncertainty, natural calamity), regional (worsening ties with India, Afghanistan) and international geo-political (Iraq) and geo-strategic (Iran, North Korea, Middle East, Oil prices) issues have increased risks to its macro-economy. Political risk is important to international investors because political events often have a dramatic effect on stock market performance. Al Qaida, the Taliban and the war on terror are not so old developments that have popped Pakistan to prominence on the international political stage. Despite all this, stock market performed strongly and achieved new heights by creating many new records in almost every session. The KSE-100 Index crossed the barrier of 15000 mark for the first time in the history of capital market in October 2007. Similarly, the total market capitalization also increased to Rs.4398 billion in October 2007.

The performance of the mutual funds industry generally keeps pace with the performance of the stock market. The strong growth in the stock market, the presence of ample liquidity and the availability of a regulatory framework has forced several major banks in the country to develop plans to launch a variety of mutual funds. The mutual fund market has grown well in the last few years though it has much more potential. As known to all, mutual funds are one of the main channels of capital flows in any country's economy.

It is widely believed that Pakistan's Mutual Funds sector is still at its infancy stage and has yet to achieve mainstream status. The regulators along with the institutions need to promote international best practices and corporate governance, spread consumer awareness and maintain investor's confidence. Pakistan's mutual fund industry has witnessed exceptional growth owing to upturn in the country's economy. Initially, the market was dominated by public entities like ICP, NIT, but with the emergence of private sector assets managers, the mutual fund sector is heading in the right direction. During the period, a series of closed-end funds were established but most of the funds suffered badly due to poor management and a slack stock market. It was only in 1996 that the sector began to creep back to life with the establishment of Abamco, an asset management company in the private sector. Since then, NIT also underwent extensive reform by bringing on investment professionals and switching to a system of market-based quotations. In 2003, ICP was broken up and privatized and the government plans to sell off NIT next year as well after breaking it into various individual funds. The fortunes of the sector turned five years back when other investment options grew less attractive. Currently mutual funds account for only 2.4% of the country's GDP compared to 6.0% for India and 69.0% for the USA. Mutual fund accounts for 16.5% of Pakistan's national savings. This sector holds great potential for future. The industry has witness phenomenal growth during the last 4/5 years. Its total assets have increased from around Rs 25 billion in June 2002 to above Rs 250 billion in September 2007, showing an increase of over 800%. The industry has gained popularity due to its improved and disciplined behavior, government support, development of specialized innovative products and investment friendly environment.

In the last few years mutual fund industry has shown significant progress with reference to saving mobilization and important part of the overall financial markets. But still we are far behind the developed countries mutual fund industry. Growth in mutual funds worldwide is because of the overall growth in both the size and maturity of many foreign capital markets. These nations have increasingly used debt and equity securities rather than bank loans to finance economic expansion. The Pakistan economy can prosper because of the benefits of new investment opportunities arising from economic reform, privatization, lowered trade barriers and rapid economic growth.

Performance of stock exchange is directly influenced by various factors including political situation of the country and as said above performance of the mutual funds industry also gets influenced by the performance of the market. During the last few years, Pakistan's stock exchanges present one of the world's most attractive investment opportunities. Despite all its plus the fact remains that it is one of the world's most under-researched markets and as a result attracts not so high foreign investment though it has potential to attract much more. It is believed that Pakistani equities are usually traded at attractive discounts thus offer medium to long term opportunities for foreign investors especially Middle East investors. Lot of funds have come from this area in past few years and number of them have invested in mutual funds which onward invest those funds in stock exchanges. In recent days, stock exchange has witnessed various swings while domestic mutual funds expect that coming days ahead things will improve and additional funds will flow in.

One of the reasons for imposition of emergency in Pakistan by the Chief of Army Staff on November 3rd was the political uncertainty. Since then stock exchanges are continuously moving up and down. On the very first day after the proclamation of emergency, the market crashed badly. After having plunged to an all time single session low of 635.8 points at 13,279 on rumors of a counter coup, the market was managed to finish well above it as investors covered positions on selected counters but there appears to be no major breakthrough. Panic is not a word one would associate with the mutual fund investors. Mutual fund investors have an adequate understanding of investment risk and tend to take a long-term approach to their investments. This can be seen the recent market position where foreign investor and local fund managers did sell their holdings but overall they remain clam.

Presently mostly bear rules at the KSE due to political uncertainty prevailing in the country as strong rumors on the political corner continuously fuelling negative sentiments in the market. Economic fallout of emergency rule showed up at recently held international conference in Karachi where large number of foreign investors from Gulf countries did not turn up though they had confirmed their participation in the conference. The same conference concluded that the emergency rule has tarnished the image of Pakistan, painstakingly built over the past few years, among foreigners. As expected capital market reacted negatively to the development because of KSE past trends when negative sentiments gripped the market just on rumors of emergency in August this year. However, foreign investors don't seem to be in a state of hurry, as according to some analysts and brokers, they are still in the market and have adopted a cautious approach in such a situation. They can opt for pulling off their investment from the stock market if the uncertainty factor does not fade sooner than later

Undoubtedly the state of emergency has created an environment of uncertainty for the business which is not a good sign. Numbers of analysts expect that near term outlook might not be as bad as a long term outlook which is significantly uncertain in many aspects. Although the future market outlook is still unclear, but if emergency is lifted during the next couple of weeks the market will bounce back to its pre-reaction levels just in no time and so as the positions of the mutual funds. If the political uncertainty continues then there is a strong possibility of downward trend in the mutual fund managers as well. It was the uncertainty factor, which is causing real problems as the imposition of emergency was followed by various rumors that are painting a confused scenario. An early end of this disturbance will help the market back on its upward track. It is also said that smooth transition to democracy will play positively with the sentiments of investors. Needless to say that mutual fund generally provides three benefits to their investors. First, they reduce the risk of investing in the stock market by diversification. Second, they provide professional management by experts in the stock market. And third, by pooling of investment funds, they allow small investors to hold a diversified portfolio. Thus it wouldn't be wrong to say that political stability with continuity of economic policies regardless of who is in government will ensure the progress of the mutual funds going forward.


The total liquid foreign reserves held by the country stood at $ 16,097.9 million on 17th November, 2007 .The break-up of the foreign reserves position is as under: -

i) Foreign reserves held by the State Bank of Pakistan:

$ 13,913.9 million.

ii) Net foreign reserves held by banks (other than SBP):

$ 2,184.0 million

iii) Total liquid foreign reserves:

$ 16,097.9 million