The Pakistani stocks’ mouth-watering returns of 49pc in 2012 and 2013 each, and a further 27pc rise last year, had attracted droves of investors to the capital market.

But those looking for their share in the fortune scarcely knew that the timing of their entry could not have been any worse. There goes a saying: ‘whatever goes up must come down,’ and the bourse came crashing down in March.

As investors watched in disbelief, the benchmark KSE-100 index continued to slide all through the month, losing 3,398 points or 10.1pc to reach 30,233 points.

It was the worst monthly market fall in five years since May 2010, and to many, it raised the ugly spectre of the crash of 2005.

Four major factors were at the heart of the market’s decline: continuous foreign selling; mutual fund redemptions; over-leveraged positions; and a sudden burst of regulatory measures

“The decline in the discount rate, upgrade in Moody’s outlook, IMF’s quarterly tranche release and stable external account numbers were all ignored by the market,” recalls Taha Khan Javed, an analyst at Elixir Securities.

Researchers at Taurus Securities concurred, saying the carnage continued despite the continuous flow of positive news, including improving economic performance, low inflation, successful IMF review, arrival of LNG shipment and the discount rate cut.

Most market participants believe that four major factors were at the heart of the market’s decline: continuous foreign selling, which was intensified by the liquidation of a foreign hedge fund, Everest; mutual fund redemptions; over-leveraged positions; and a sudden burst of regulatory measures that scared the broker community.

Foreign investors, who had led the spectacular rally during the past three years, sold a net $71m worth of stocks last month; these were mainly bank and cement stocks. Mutual funds also offloaded shares worth $56m to meet redemption requests by investors.

The market took a turn for the worst on March 31, when the benchmark index plunged by a massive 1,030 points or 3.44pc — the biggest single-day decline in recent history. The fuel that fired the selling was the foreign portfolio outflow, which has amounted to $125m so far this year. This spread fears about the flight of foreign capital and sent local investors into panic selling.

Large-scale redemptions by ‘capital protected funds’ exacerbated the fall. But the market recouped all of Monday’s losses the next day, rising 1,306 points or 4.52pc. While this spectacular rise was as unpredictable as the massive fall of the previous day, several market strategists saw a method in the madness.

“Investors were comforted by foreigners buying a net $5.61m worth of equities on Tuesday,” said one market watcher. He pointed out that foreigners, who hold around 40pc of the market’s free float, were eyeing attractive valuations as the stocks had tumbled 9pc in just five previous sessions and 17pc in eight weeks.

KSE Managing Director Nadeem Naqvi was cool as a cucumber in the face of the heavy drop on Monday. “It appears to be sentiment-driven,” he had told Dawn, and believed that as valuations drop to attractive levels, investors would re-enter. He also reasoned that there had been no change in fundamentals that would warrant such a plunge.

“The underlying earnings growth is healthy; the interest-rate factor is positive and liquidity flows are comfortable,” he asserted.

Former KSE Chairman Arif Habib said that since February, the index had been weighed down by 7-8 stocks in the heavyweight oil and gas and banking sectors. He believed that around half of the index’s dip since February could be traced to these two sectors, while the rest of the 20 sectors were doing well.

Meanwhile, not many brokers were willing to comment on the suddenly aggressive role assumed by the apex regulator, the Securities and Exchange Commission of Pakistan (SECP). The SECP had cracked down on ‘insider trading’ and ‘in-house margin financing,’ and had launched initiatives to track down foreign flows to ascertain their ‘beneficial ownership’.

KSE MD Naqvi, when asked about this, responded that the “SECP and the KSE have to do their jobs as the apex regulator and the frontline regulator since it is important for the protection of the investors and to maintain the market’s credibility”.

With regards to fundamentals, several brokerage houses worked out that in the quarter ending December 2014, the collective earnings of listed companies stood at Rs92.6bn — up a hefty 28pc over the previous quarter and 23pc over the same period of the previous year. Forward corporate earnings growth is visualised at 12pc by Taurus Securities.

During the quarter, the oil and gas sector was a major drag on earnings. Also, the central bank has slashed its key interest rate to an 11-year low of 8pc. An economist pointed out that from its peak of 14pc in November 2010, the SBP’s policy rate had recorded a big decline of 6pc in four years, breathing life into highly leveraged textile, cement and fertiliser companies.

Engro Fertilisers Limited CEO Ruhail Mohammed recently told Dawn that his company had brought down its debts from Rs70bn in 2012 to Rs44bn. Kohat Cement’s CEO, Aizaz Mansoor Sheikh, said the decline in finance costs has enabled companies to direct their liquidity towards repaying long-term loans, with the benefit travelling down to their bottom lines.

Zulqarnain Khan, an executive director at Next Capital, said that the market fall may have bottomed out, as the fundamentals have turned attractive.

And the benchmark index does appear to be back on an upward trajectory. By Thursday, it had clawed its way back up to 31,132 points, from a low of 28,927 on March 31.

Published in Dawn, Economic & Business, April 6th, 2015

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