A PALL of uncertainty may hang over the country from the violent political storms that have just passed, but the stock market is hearing none of it. It was hit by a bout of volatility during the days leading up to the planned lockdown, but on the day the PTI announced the end of its bid to shut down the capital city, the stock market surged by 1,400 points, the highest.

Turnover of shares also jumped by record amounts on that day, with more than 506.5 million shares traded. Investors rushed in to cash in on the low valuations as soon as the uncertainty was removed.

“The market is working on the assumption of a best-case scenario,” says Farid Khan, the CEO of HBL Asset management, one of the country’s largest asset management companies. Out of the Rs46 billion assets under management, his company is unique in that it keeps more than half in equities, compared to one-third for other funds.

“The market is assuming that the political situation will not worsen; there will be no adverse intervention from the Supreme Court in the Panama leaks affairs, and the upcoming appointment of a new army chief will go smoothly.”

Even during the days prior to Nov 1, sentiments remained mixed. Although domestic investors, both retail and institutional, rushed for the exit, foreign institutional investors appeared to have increased their stakes.

On October 28, for example, as the government battled protesters and a cigar-wielding Sheikh Rashid on the streets of Rawalpindi, keeping Imran Khan confined to his home in Banigala, the stock market saw an inflow of foreign investment of $4.7 million, large by Pakistani standards. Almost all of this was accounted for by foreign corporates, with overseas Pakistanis and other retail foreign investors remaining net sellers.

The day before foreign investment in the stock market was $8.7m, again accounted for by foreign corporates with retail clients being net sellers.

On November 1, as the crisis receded, foreign investment stood at $1m while domestic retail and particularly institutional investors rushed in, lifting the market by 3.5 percentage points. The total size of the drop it saw during the days of the protests was 5 per cent.

According to Arif Habib, one of the country’s most prominent stock brokers, foreign investors are relatively less responsive to the political noise in the system compared to domestic investors, preferring to stay focused on fundamentals. “Our profit-to-earnings ratios are closer to 9.5 whereas the region is operating from 12 upwards,” he says, pointing to the significant room for growth in Pakistani stocks. The outlook on the oil price and interest rates will be crucial, he says.

The KSE 100 ended the week at 41,841 points, after briefly crossing its highest level of 42,000 points in intraday trade. Some ground remains to be recaptured from the days preceding the protests, but the sentiment appears to be back on track.

Market players attribute the strength of the market to surplus liquidity coupled with low returns on fixed income investments due to low interest rates. Some also point to a slump in the property markets due to the new valuation tables announced by the government for assessing taxes on property transactions.

Both Khan and Habib say most of the buying following the end of the protests is coming from high net worth individuals, corporates and other institutional investors, with retail investors continuing to feel shy.

“The market is calculating that the powers that be would not want to upset the equation so close to the elections, which are only 18 months away,” says Khan.

That leaves investors with little more than the fundamentals to deal with, which are stable for the medium term.

On the trade floor, K-Electric was the winner on Nov 1 when the big surge happened, closing at Rs9.6, with the highest turnover of 41m shares, representing an increase of almost 3pc, close behind the KSE 100 index which increased by 3.5pc. Some of those gains were clipped by the end of the week, when the share closed at Rs9.38 against trade volume of 9.9m.

In sector terms, Habib sees banks performing well because of an uptick in inflation which is likely to halt the continuing slide in interest rates. Oil and gas stocks have also registered significant activity, and if there is an uptick in oil prices, these rises may continue further, he says.

Published in Dawn, November 5th, 2016