Impact of Portfolio Investments on Stock Market Performance

Transcription

1 Impact of Portfolio Investments on Stock Market Performance Saeed Ali *, Iqra University (IU), Main Campus, Karachi-75500,Pakistan Dr.Javed Hussain* Iqra University (IU), Main Campus, Karachi-75500,Pakistan Abstract: Portfolio investment in the form of equity flows has a very important role in the economic sustainability and growth of investments for developing countries in the world, unless governments would ensure proper safety and risk of investor s portfolio as well as give benefits to the investor would make sure the funds or money which emphasized and triggers foreign investment. In my research analysis, the requirements for data of some variables affecting stock market performance in the era of and see the effects that would probably realizing the results. The statistical test that is applied and is conducted in the form of simple linear regression to check the influence of PI (equity flows to the stock market index and that of market volume of Karachi Stock Exchange-100 index. The results gives the information about portfolio investment which are equity flows has show week correlation or effect for index points and there is a little predicting behavior is shown while for market volume number such effect of equity flows and it remain insignificant. Keywords: Portfolio Investments, Karachi Stock Exchange-100 index. 1. Introduction In the Last three decades there has been considerable amount of investment is done from foreign countries which are inflows to Pakistan beside India and other South Asian region that is from in almost every sector from agriculture to the pharmaceutical and food manufacturing companies and in the entrance of next century that is from 2000 and onwards mostly Telecom, IT and banking Industry has been in the focus. South Asian markets performed reasonably well along these years, especially Pakistan after 9/11 to make the right portfolio choice and stocks. The Thesis objective s is to set the Portfolio Investment s impact on stock market performance in Pakistan mainly Karachi stock exchange. In recent years it is the hot topic for investors in developing countries mainly South Asia, Middle-East and Fareast, mostly Investment is done in buying stocks, equity, long and short term bonds. PI in the form of capital(foreign) Inflows or equity flows to Pakistan which would reflect stock markets either ways is the area where international investor puts focus on changing environment and economic status and large volatility is shown in the region especially Pakistan because of high risk level and stability. Most of the investment in Pakistan comes in the form of foreign direct investment in recent years with other developing countries in the region but the importance of portfolio investments also increases parallel with FDI and whether it contributed much in the economy and the Electronic copy available at:

2 behavior changes of stock market. If the inflow increases which makes the capital of the country increases by increased foreign capital where the expected returns in abundant resources countries are tends to be lower which shifts the funds to resource scarce countries from the returns to be expected are higher, so the resources flow makes the investment higher by putting the cost of capital to its lower side and increases output efficiency. According to some economists there may be another view that foreign capital flows could not have relation to the real economy so it shows no changes in the investments and output. Equity inflows could affect the domestic stock market, and boost the stock prices. There has been an investment in Pakistan where fdi s and portfolio investments form in the manufacturing and service industry mainly telecom sector but the main factor that has always been highlighted is the risk.the risk which is associated with the all types of investments because this is the prime factor and investor is very much concerned about the expected return whether it is invested in equity, long term and short term bonds, stocks etc. Risk can be of three types economical, social, and political. To attract the returns it is equally important to sustain the inflows of portfolio investments, so if there is speculative behavior in equity flows it would add fiscal cost and damage the economy of a developing country like Pakistan, so the cost that brought in must be compensated by the benefits from the investors so as to decrease the cost that revolves with the economic factors to develop a better stock market based financial system then more portfolio investment is required to induce in the economy. In Pakistan non-residents were only allowed in 1992 to sale and purchase of equity stocks. For the purpose, they are required to open a Special Convertible Rupee Account (SCRA) through which they can participate in stock markets. Portfolio Flows to domestic market are linked with any type of return, with equity purchases and right type of investments, this is done with more capital flows in the country specially in Pakistan, when matching performance of portfolios in Pakistan we see stock market performance or volatility which is the measurement of changes in the stock price, share, index, market capitalization and turnover changes. Karachi Stock Exchange performance is recognized all over the world as emerging stock exchange but due to political upheaval in the country its efficiency decreases. In earlier research for equity market liberalization or globalization that has been influenced by various economic growth factors and booms in the investment criteria and what reforms have been made for liberalization. The development in the stock market and capital inflows are major part of the analysis by the researchers in which it is determined that hurryingly for the growth of the economy in the long term and quicker industrialization would not help the developed countries further more share price for a high volatility in emerging markets make speculative behavior more than the developed market so it is terrible to give the capital amount to the speculators (Singh & Weisse, 1998). In our analysis on market efficiencies in securities context is important in analysis of stocks performance which is an important indicator in stock market. Many tests can be applied to judge the reflectivity of risky assets versus stock return and expected return on market. Electronic copy available at:

3 2. Literature Review Singh and Weisse (1998) studied that stock market development is a major constituent of capital inflows. In the developing countries the capital flows is much important to measure the economic strength. Developed countries need to focus on capital flows for Long-term nature. The role of stock market is financial development and economic growth, productive efficiency; also foreign exchange plays a vital role in stock market development. Stock market more often favors the short term profit rather than long term investment by the corporate for an efficient investment for a developing country, same as with portfolio capital inflows also shows the same approach as with stock market but they are not reflected and related by economical aspects so their quick rollover could give decreasing growth in the economy. Singh and Weisse (1998) examined the stock and foreign exchange markets go unstable with negative relation between then this is due to the developing countries with shocks pertaining in it. The developing countries of Asia with economies dynamical nature and the financial systems come under the dominance of stock market. So for financial liberalization and other markets proliferations that is hurting the financial dominance over industry putting focus on financial market gaming over industry production process, the developing countries make the measurement of capital flows and restrain from taxation policy and reserve requirement further more banking systems needs to be improved rather than focusing on stock market promotion because banks stabilize the growth for long term movements and for better industrialization, to develop real economy governments should control the corporate for developing industrial groups and globalization burden for developing countries are high to control the flows and market movements. Uppal (1993) worked on stock markets and realized that Karachi Stock Exchange is the main functional stock market in Pakistan. Openness to the foreign investor exchange rate regulations highly affects the economic condition of the country. It competes with Korea and India in the same region. The study of stock exchange in the evaluation of capital markets is extremely important and where there is stock market grows generates more portfolio investment flows to the country. Developing countries can only increase GDP by allowing more investment inflows by lifting restrictions on foreign investment the more capital comes in. The oldest of the stock markets in Asia has some institutional problems and thus facing volatility. Uppal (1993) measures variances of homogeneity for the period, in which different internal and external macroeconomic factors were taken. Effects of volatility on returns were thus measured and found that volatility increased during the 5 year period. Volatility of Asian Markets such as Japanese, Korean and USA within the period from effected the domestic market. There is no association in the changes in the mean of stock returns with the foreign markets prices changes. Consistent results of hypothesis in the efficiency information for financial markets and suggestions for integration of Pakistani markets are in under great influence of regional markets than the distant one. There is an indication of integration of lower degree with more opportunities to offer for funds globally by Pakistani markets with diversification at international level at reduce risk level. Electronic copy available at:

4 Rachdi, Houssem, and Saidi (2011) worked on Foreign Direct and Portfolio Investments studies in the growth for economic sector both in development and industrial economics and found the empirical results with conflicts and ambiguity. The researchers for working in FDI s and PI s has not been able to find the right relationship between them and investigated effectively. In a broader sense each one has its own impact on growth with the help of technological and knowledge flows, so in the study of empirical approach it is analyzed that PI statistically insignificant for developed economies likewise in a GMM estimation it is positive so for room effect where positivity remains in the coefficient while the rest is negative and significant. Reforms in the financial sector are significant between for the developing countries so the local exchange markets with the volume affects the FDI s in domestic economies. A panel data analysis for empirical study in the FDI s growth in the economics while for PI s has no impact on output growth but the coefficient remains positive and provide significant result for developing countries, for a GMM estimates with the room effects estimates included, which clearly states with the increase in PI flow tends to have positive impact on growth output on the implied developing countries also governments should maintain the regulation to attract PI and FDI. Brennan, Michael, and Cao (1997) researched that the investor is interested in buying low cost assets while at the same time sell when prices are high, this usually happens in between domestic and foreign market trading which are based on return. A model is tested to find differences between returns of domestic and foreign markets. It is evident that portfolio flows are integrated with return and affect the market conditions with the purchases of equities, assets, securities etc. International equity flows is important for foreign investor to invest in developed markets. The investor s protection is concerned with globalization changes here India is no exception, there are difference in investments developed markets and underdeveloped region. Maharaj, Galagadera, and Dark (2011) studied the volatility of market return is measured on different time scales for both developed and emerging markets for a method known as decomposition of wavelets. The techniques of wavelets used for different frequencies for different time zones for different time scales, it is important for investors to check the daily return of portfolio investment occurring in the markets so as the mindset is developed about volatility and time horizon for investment strategies and trading decisions. Wavelet method is used for application to any time series analysis and to have time intervals with variability for a technique of windowing. It is useful in daily frequency intervals. The lower time scales data dynamics with speculation for the investor to invest from medium term and onwards which could reflect the horizon investment at time scales for higher region. Maharaj, Galagadera, and Dark (2011) observed from the analysis that the emerging markets provide more shocks and variation than the developed markets so the difference occurred at low time scale, so if the time scale appeared to be higher than the volatility lowers at it goes, so time scales are set to show association with volatility measurement. Dr.Asma (2011) studied that foreign private investments include direct investments and Foreign Portfolio Investments this has been studied by Salman, Asma to check for empirical evidence in support of statistical analysis to check the effect of economic growth and financial accounts of trade and capital with the help of ADF and test of Granger causality. Vita and Kyaw (2008) studied the effects of analysis of VAR structure

5 and the significance of relative determinants in investments of fdi s and portfolio flows of capital nature of five developing countries where most of the findings are related to economics sector which are outputs of foreign investments and productivity of domestic variable that flows of capital nature effects disaggregated supply. It is highlighted that policy need for developing countries that changes the shock in the activity of economic sector. Uppal & Mangla (2006) exercised that in the comparative studies between Karachi stock exchange and Bombay stock market because regulatory response and economic conditions differ in both these markets. Eagly, Johnk, and Liston (2010) studied Foreign Investment inflows in united states by an impact of risk factor for investors and stock market behavior.var model was taken to study the effects of corporate bonds, corporate stocks, net inflow as against the risk and responses were taken from the test between variables that how stock inflows to the US is influenced by stock market and that stock inflows to the US which is effecting the risk aversion. The main portion of investment was done in bonds and stocks, other economical factors might hit the international investments but it is not included in the test. Eagly, Johnk, and Liston (2010) used VAR model used by other researchers for relevant information of variables and suggested working on gross purchases and gross sales for US corporate Stocks and using Risk Aversion for portfolio investment in Asia and Latin American countries. Froot, Connell, and Seaholes (2001) described that International Investments inflows are related to several factors such as equity returns and so finding out their behavior of flows. The flows may be Stationary through time but effects stock prices in future. For persistence in the flow and price effect negative or positive shocks is determined. Sensitivity of stock prices to foreign inflows appears to be large and positive, influence of flows effect the past returns, the feedback should be positive with regards to international investor. An inflow tends to be good in future returns. It is doubt that outflows by foreigner wipeout price stability, in contrast to the trading concept where information is linked to the price hike, outflows are projections of fundamentals. Bekaert, Harvey, and Lundblad (2003) studied that Liberalization in equity markets has great impact on the economical and financial sector where integration of capital markets is effective. The integration of markets is difficult to study and becomes complicated because the liberalization is done in different ways and routes. The date where emerginesses of equity markets for liberalization is effectively developed and the particular policies and sequencing of it for systematic procedures to produce the effect on real economy for synthesis in the liberalization of current methods in this sector. Bekaert, Harvey, and Lundblad (2003) suggested that the structural change comes in the world capital markets is considered to be the best when integration of equity markets occurs. It affects everything like flows in the capital, local companies businesses, and pricing level. For a growth in GDP increased in the investment is associated with lower capital cost. The important factor is the dating for research in the liberalization of markets that every country did for integration and the analysis and sequencing is yet to be made focus for research in future. In the economics of market theory the role of speculators is very important where most of the businesses takes place, so speculator have a prominent role in US Markets, with the capital markets where reservation is more for international investor. Foreign investor

6 comes in the emerging markets for investment and checks the variables of returns and emerging markets. Bekaert and Harvey (2000) studied funds for an investment company whose investing for portfolio assets, shares are issued by them.trading in the foreign markets are measured in two types of prices e.g. share price on the market and funds net asset valuation.us investors invested in third world countries. Colinearity is observed between cost of capital and ownership of foreign investor. Measurement of cost of capital is difficult,this is because changes occurs gradually in when capital markets likely to integrate so the calculation through average return changes is difficult, changes in the price level to measure the return in liberalization than aggregation of yielded dividends are used. Bekaert and Harvey (2000) summarized that decrease in dividend yield occurred due to the changes in returns and increases in the cost of capital, secondly the unusual high and low of liberalization above the average returns then the measurement of returns appeared to be biased and little biasedness on dividend yield so endogenous result of bias appeared that when there is an advantage for government then liberalize markets when there is a decreased in stock price. Demir (2009) studied performance of real investment in three countries and visualize differences in the fixed and financial investments. Through return rates. Increasing in the rates and gaps effected the fixed but not the financial investments.financialization of developing countries is nonexistent in virtual format with the help of empirical research. It can be said for emerging markets with the choice of investment in portfolio. The uncertainty in the investment is being studied for three countries and to check the profitability rates where the semi-annual data is taken and the firm level data is gathered. Firm level data identifies the countries for the main hypothesis while difference across countries is measured. It is found that growing return rates gap in between investments of fixed assets and that of financial and the uncertainty in the macroeconomic and risk factor had the retarding factor which is significant in the statistically and economically. Rising rates leads to significance which encourage financial investments.heterogeniously the risk and uncertainty effects total assets of investments of shares across countries.turkey, Argentina and Mexico from 1980 s are en route to financial liberalization. The governments with high debt instruments when there is an increase in volatility and uncertainty, so in the hunt for getting quick returns in the market of booming economy with more ease of liberalization it did not lead to investment and growth. Mollah and Mobarek (2009) used GARCH testing on volatility shocks for emerging and developed markets for a risk-return relationship. The data used in the process has some inconsistent with sampling of the periods. The method used for the applications of finding capital cost in the investment and for management in portfolio approach and pricing options and regulations in market. They found the persistence of long term shocks for developing and emerging markets. Volatility patterns for developed markets shows decreasing pattern whereas for emerging markets it shows an increasing pattern over time period. This has been observed that nonlinear patterns of market return data series analysis of which high predictable risk and return relationship of emerging market in comparison to developed market. It means to generate more volatile nature of emerging market then the developed market, so they resulted in an optimal financial aspect of hedging and portfolio approach. Ports and Rey (2005) widely researched the equity flow pattern through equity model for financial assets in the international investments for better trade settlements. Flows of gross transaction are dependent on source of size in market country location, cost in tradings

7 when transaction along with information runs through it. Proxies at distance that adds some cost to the information with other explicit variables like transmission information, asymmetrical information exist in between investor of domestic and foreigners with the transaction efficiency. The story of the results circles around equity holding to its transactions. Hypothesis H1: There is a relationship between Equity Flows and Stock exchange-kse-100 Index Points. H2: There is a relationship between Equity Flows and Market Volume of KSE-100 Market Volume. 3. Research Methods & Econometric Models The information for secondary data sources are available on state bank of Pakistan,KSE,IFC,yahoo finance and related other internet search. It consists of time series data that has been taken from the state bank of Pakistan for portfolio investment in the form of equity flows from foreign countries to Pakistan. The one of the oldest stock exchange in the region is The Karachi Stock Exchange which remains active at all times. There are several representatives and many blue chip companies listed in stock exchange, so the equity flow data in the form of portfolio investment is available in the stock exchange Uppal and Mangla (2006).It holds the position of leading stock exchange in Pakistan and holds the title of Best performing Market for the year 2002 in the world. The highest level it achieved in April 2008 that is above but could not hold that position and decline to 9000 in September The stock Exchange variables are Index points and volume in millions from the Karachi Stock exchange-100 index. The data comprises of (20 year monthly basis) of portfolio investments and that of index points and market volume which gives approximately 145 observations from the state bank of Pakistan and Karachi Stock exchange. The Research Models are: INDXPOINTS= ά1+βeqtflw+et1 Equation 1 MRKTVLM== ά2+βeqtflw+et2..equation 2 The research model in this research method is that the portfolio investment which comprises of equity or capital flows puts an impact on stock market performance mainly the KSE-100 index. The statistical technique used in the analysis is the simple linear regression (SLR) and the method is enter. There are several estimates used in the previous research papers for equity flows and economics for different types of variables but here only one variable is used to test on the trading volume and index points to see whether they show any signs of positivity or negativity. 4. Results Table 4.1: Relationship between Equity Flows and KSE-100 Index Points

8 Regression Analysis(SLR) Model R RSquare Adjusted Durban R Square Watson The SLR shows adjusted R 2 is or 4.3% so it can be used to predict the possibility of independent variable of 4.3% on dependent variable. Table 4.2: F-Test/Statistcs Model Sum of DF Mean F Significant Squares Square Regression 1.311E E Residual 2.491E E7 Total 2.622E9 140 The above table gives further analysis of validation of the applied model. From above table it can be seen that significant value is that is lesser than It Suggests that applied model is suitable to run on the data sets. The value of F-Statistics explained that hypothesis is accepted or rejected.the value of F is which is greater than 3.85 which means that hypothesis is accepted.based on results it is concluded that there is a relationship exits between Equity Flows and Index Points hence above statement is accepted. Regression Analysis(SLR) Model R RSquare Adjusted Durban R Square Watson The SLR on another data set for market volume dependency on KSE-100 index which shows negative values and does not predict the behavior of market volume on KSE-100 index. Table 4.3: Relationship between Equity Flows and Market Volume of KSE-100 Points Model Sum of DF Mean F Significant Squares Square Regression Residual 9.602E Total 9.630E8 140 The above data table revealed that it can be seen that significant value of PI is that is greater than The value of F-Statistics explained that hypothesis is accepted or rejected.the value of F is very low that is which is less than 3.85 which means that hypothesis is rejected.

9 Hypothesis Assessment Summary Figure 1: Relationship of Equity Flows (PI) to Index Points Figure 2: Relationship of Equity Flows (PI) to Market Volume of KSE-100 index S.NO. HYPOTHESIS RESULT H1 H2 There is a relationship between Equity Flows and KSE-100 Index Points. There is a relationship between Equity Flows and Market Volume of KSE- 100 index. ACCEPTED REJECTED 5. Discussion and Conclusion According to the results analyzed it is found that there is a relationship established between equity flows an index points which means that if investments increases than it gives positive effect on index points and it increases and vice versa but it shows weak correlation between variables i.e. the portfolio investment is not predicting the index points as it should be. So the first hypothesis is accepted on the basis of weak correlation. But for market volume it is found that the equity flows gives no predicting behavior on market volume conditions and no relationship exists between equity flows (PI) and

10 market volume that means the second hypothesis is insignificant. Here it is analyzed that equity flows or capital flows behavior on the stock exchange variables for the performance measurement and took simple and single variable effect except economic variables.the forecasting nature of capital or equity flows for stock exchange performance does weak predictions about index points, which means that portfolio investment does not much impact on stock exchange variable along the years. The other hypothesis is unable to explain the relationship of portfolio investment and market volume from the information given. As it is shown that if market volume increases the investment expansion tends to be broaden but here it shows no relation which means that what amount of equity flows or portfolio investment coming in the country is not affected the volume of investment and that of any activities in the market. Portfolio investment as inflows and outflows will remain under discussion as long as new information is coming and the environment and economical changes, and with market co integration movements and market competition with other region. Implications and Future Research Karachi stock exchange tends to show greater volatility in the region that is why any small change in the input makes large impact in the trading conditions of the market both from local and foreign investor in the era of that is why single variable model adopted to check any variation or any relationship that can amply the results but it does not happen in this case which means that markets are moving in integration and investment tends to stabilize, either the volatility in Karachi Stock Exchange does not effecting much the investment inflows after any unforeseen consequences happened or the investor are much aware of the environmental changes and market competition in the south Asian region such as India and china. There are numerous facts that can be taken and can applied for future research because there is a wide scope for investment parameters and criteria to be studied e.g., mutual funds, long term bonds in the capital markets, securities and its derivative,foreign exchange and all these will impact on stock market condition if more variables included a better idea of Portfolio Investment flows into the country and what changes that can affect the market conditions but yet the simple model did show about the investment pattern and criteria in Pakistan and investor willing to invest even in the high risk condition. References Bekaert, Geert., Harvey, & Campbell R. (2000). Foreign Speculators & Emerging Equity Markets, The Journal of Finance, 55(2), Bekaert, Geert, Harvey, Campbell R., & Lundblad, Christian T. (2003).Equity Market Liberalization in Emerging Markets, The Journal of Financial Research, 26(3), Brennan, Michael J., & Cao H.Henry. (1997). International Portfolio Investment Flows, The Journal of Finance, 52(5), Demir, Firat. (2009). Financial Liberalization, Private Investment & Portfolio Choice: Financialization of Real Sectors in Emerging Markets, In Journal of Development Economics, 88(2), Eagly, Peter V., Johnk, David W., & Liston, Daniel Perez. (2010). Foreign Portfolio Inflows To The United States:The Impact Of Investor Risk Aversion & US Stock

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