Massive Foreign Selling in Pakistan Stocks
Foreign investors in Pakistan sold equities worth over $1 billion in the current fiscal year, according to official data and analysts. The selling spree has been attributed to escalating tensions in the Middle East following the Iran war and Pakistan's reclassification in global financial indices.
Data from the State Bank of Pakistan (SBP) shows that foreign investors bought equities worth $298.3 million and sold $1.03 billion during the fiscal year to date, resulting in net outflows of $736 million. Investors from the United States, the United Kingdom, and Sweden accounted for nearly 80% of the outflows.
Key Drivers: Index Downgrade and Geopolitical Risks
Economist Muhammad Waqas Ghani, head of research at JS Global Capital Limited, told Arab News that the key reasons behind the foreign selling were Pakistan's reclassification in global indices and a surge in global risk aversion amid Middle East tensions. Global indices FTSE Russell and MSCI Inc. downgraded Pakistan from a “secondary emerging market” to a “frontier market” in July 2024 and September 2021, respectively. This reduced Pakistan's weighting in benchmark portfolios, prompting foreign funds to adjust their holdings.
Ghani also noted that geopolitical uncertainties following the Iran war made foreign investors risk-averse. “The foreign investors were pulling capital from all such regional risky markets,” he said.
Despite PSX Rally, Net Outflows Persist
The outflows mark the second consecutive fiscal year in which foreign investors withdrew more money from Pakistan's stock market than they invested. This occurred despite a strong rally in the Pakistan Stock Exchange (PSX), where the benchmark KSE-100 Index rose 40% to 178,922.76 points from the start of the fiscal year. The Economic Survey of Pakistan 2025-26 attributed the rally to encouraging macroeconomic indicators, a favorable external account, lower inflation, and renewed investor confidence in the government's reform agenda.
However, the survey noted that the momentum faded toward February 2026 due to uncertainty from tensions with Afghanistan and escalating regional geopolitical tensions. “Higher global oil prices, foreign selling, domestic profit-taking, and the seasonal slowdown during Ramadan led the index to drop,” it added.
Outlook: Peace Talks Could Reverse Flows
As Pakistan's senior civil and military leadership prepare to attend US-Iran peace talks in Switzerland on Sunday, Ghani expressed hope that an agreement would bring foreign investment back. “With sentiment now turning because of the recent US-Iran peace deal, we see foreign flows reversing course next year, making current valuations an attractive opportunity for long-term investors,” he said.
