MINUTES after the start of trading at the Karachi stock market on Friday, the benchmark KSE-100 index shot up by a staggering 1,063 points amidst euphoria over the possibility of an end to the political turmoil that has lingered for more than two weeks.

After a flurry of buy orders, sanity returned and the market closed on Friday with a gain of 793 points.

Most brokers termed this a ‘relief rally,’ triggered by hope of resolution of the political impasse following talks of the protesting parties with the Army chief. Yet, before dusk, investors realised that the worst may not yet be over.

Even otherwise, the market had recouped 2.86pc on Friday (from the nearly 5.6pc losses suffered over the past two weeks) — due entirely to foreign buying of $10.71m worth of stocks; local institutions and individuals had all turned out to be net sellers.

Fourteen days into the political wrangling, analysts are still calculating the loss to the economy, mounting by the billions each passing day. The standoff between the PML-N government and the opposition Pakistan Tehreek-e-Insaaf (PTI) and its loosely tied ally Pakistan Awami Tehreek (PAT) has taken its toll on the country’s capital markets.

In the fortnight since August 8, when the two parties started their march towards Islamabad, the KSE-100 index has plunged by 1,606 points or 5.6pc. “From its peak, the benchmark index has already sunk 10pc,” calculates Zubair Ghulam Hussain, head of equity sales at Foundation Securities. He observes that a majority of the blue chip stocks have lost between 20 to 30pc of their value. Yet, several brokers are trying to calm investors’ fears.

Arif Habib, a senior broker and former KSE chairman, believes that the market’s decline has more to do with the blow to investor sentiments and less to the actual damage. “The sentimental impact has been enormous, but it has barely changed corporate fundamentals,” he argues. Several senior brokers and analysts concurred with that analysis.

Raza Jafri, head of research at AKD Securities, put it this way: “You might say there are country-specific risks, but no company-specific risks, as fundamentals remain strong”. Most think that foreign investors as well as major institutional players and high net worth individuals have adopted a ‘wait and see’ stance.

“Unless the political events take a turn to something terrible, such as the return of the army to power, the market has the resilience to rebound to the high old levels,” says a senior analyst at Topline Securities. He mentioned that over the last 10 years, Pakistani stocks traded on average price-to-earnings (P/E) multiple of 8.2 times forward earnings. And that level is easy to achieve once the dust on the political front settles. However, that is not to say that the market has weathered the political storm.

“The rupee has lost 3.5pc of its worth against the dollar; the property market is listless; local currency 10-year bond yield has inched up by 13 basis points to 13.31pc; Pak Eurobond (2019 bond) yield has risen to 6.7pc from 6.5pc, while the 2016 Eurobond yield has climbed to 5.3pc from 4.8 pc before the current crisis began,” the Topline analyst recounted some of the damage.

AKD’s Jafri mentions that stocks are trading at a multiple of 6.9pc before the general elections in the country — marking the first smooth civilian-to-civilian transfer of power in Pakistan’s 67-year history — and the market has surged 40pc since then. Only 15 months in office, the PML-N government, dubbed by many as ‘business friendly,’ is doddering at the edge of the cliff.

Yet, the silver lining is the ‘wait and see’ attitude of foreign investors. The overseas investors maintained a cautious approach until the news came of the Army facilitating the resolution of the current impasse on Friday.

“In the last two weeks, where local players, particularly mutual funds, dumped $44.8m worth of equity, foreigners betrayed no sign of panic,” say analysts, adding that foreign funds, on the contrary, turned out to be net buyers of $8.5m worth of equity over the week.

Mohammad Sohail, CEO of Topline Securities, argues that it is the unexpectedly prolonged crisis that has created fear in the minds of investors, and not the outcome. He says it is uncertainty that has spooked investors, as it is universally recognised that for the stock market, “uncertainty is worst than bad news”.

Most brokers and stock strategists have many reasons to be confident about a rebound. “Stocks have intrinsic values; investors have experienced rich returns of over 100pc in 2012 and 2013, and there is more holding power due to the all cash market,” says Arif Habib. An optimist even argued that the strength of the dollar would benefit the textile, exploration and production and the IPP sectors, which form a major portion of the listed stocks.

But for all that, market participants were unwilling to hazard a guess about the future. “Depending on how the events unfold during the weekend, the odds are evenly balanced,” said one senior broker.

“Recovery of the remaining 7pc loss, after adjusting 3pc gains on Friday, is as much in sight as the loss of another 10pc, given the possibility that there is no end to the standoff between the government and the protesting parties,” lamented this broker on Friday evening.

Published in Dawn, Economic & Business, September 1st, 2014