The Pakistan stock market seems to be freeing itself of the tight bear hug that has lasted for over the past fourteen months. The semblance of political stability post timely elections has given a new lease of life to the listless market.

There is an air of optimism. Investors are torn between the desire to lap-up high-growth blue-chips available at attractive discounts and the fear that until the new government is seen to be firmly in the saddle, the number game in Parliament could still turn the tables.

A random survey by this writer covering six brokerage houses, some big brokers and a few fund managers, suggested that going forward the overwhelming majority was looking at a steep rise in stock prices, represented by the benchmark KSE-100 Index.

They tend to agree that by the end of December the magic number of the 100-share index would be 50,000 points. This should be music in the ears of investors who have suffered through perhaps the longest period of depression in the history of the Pakistan equity market.

At 50,000, the Index would fall short of just 3,124 points from the highest ever level of 53,124 points reached on May 25, 2017. In the six trading sessions following the general elections on July 25, the Index has gained in all but two lean sessions on July 31 and Aug 2.

There is an air of optimism. Investors are torn between the desire to lap up high-growth blue-chips available at attractive discounts and the fear that until the new government is seen to be firmly in the saddle, the number game in parliament could still turn the tables

On net the benchmark has climbed 991 points or 2.4 per cent. The Index closed last Thursday at 42,330 points. By that reckoning, it has to propel 7,670 points or 18pc in the next five months to end-Dec.

Two major brokers, the former chairman of the Exchange Arif Habib and the well-known value investor broker Amin Tai, concurred with the prospect of seeing the Index at 50,000 by end of 2018.

Mr Habib said that political stability would pave the way for addressing the malady that currently plagues the country’s economy: “decreasing the fiscal deficit by two per cent and going to the IMF to replenish the depleting foreign exchange reserves are steps that need to be taken to return the economy to health,” he said.

Agreeing that IMF lending always has conditionalities attached, Mr Habib said that nonetheless the programme would be positive for the economy as the benefits should pass on to the country’s financial markets.

The former broker-turned industrialist however added caveats. He said that the winning political party had made big promises of creating 10 million new jobs and providing one million houses to the homeless, but it has yet to be seen if these aims are achievable. For example, the government will require the cooperation of the provincial governments to meet fulfil its housing promise, while it will also have to sweep away well-entrenched, corrupt elements in the Federal Board of Revenue, land department and other government offices.

Value investor broker Amin Tai stressed that the reason for the long languishing equity market was the loss of investor confidence in all spheres of governance.

He thought that the foreign exchange reserves that have hit rock-bottom could be replenished as several friendly countries and even the IMF would be willing to extend loans and bailout packages once they are comforted by the knowledge that the money would not be siphoned off by corrupt leaders and economic managers. He believed that the IMF was unlikely to punish the incoming government for the mistakes of its predecessor.

The two major spoilers of the equity market are the foreign investors and mutual funds. With well over Rs600bn vested in the mutual fund industry, which includes over Rs200bn in equity and money market funds, fund managers now command the power to set the direction of the market.

They are quick to jettison stocks at the first sign of trouble. A manager of a private equity fund did not mince words in agreeing to be the first to dump stocks when market prospects appear bleak: “I am not here to bail out the market. My job is to protect the money entrusted to our funds by the public,” he said.

Mutual funds also have to maintain a prescribed balance between the money invested and cash-in-hand so as to comfortably meet redemption requests.

Except for sporadic net buying, foreign investors have continued to dump stocks over the last two months. Overseas investors, mainly foreign funds, are believed to hold around $6bn worth of shares in Pakistan’s capital market.

As much of their stake is in blue-chip, large market capitalisation stocks, foreign selling has the propensity to pull the entire market down. A market watcher said that although foreign outflow is not Pakistan specific and most foreign funds in other emerging markets are shifting dollars from equity to bonds at home, Pakistan may manage to plug the outflows through currency stability and improvement in the country’s political and economic conditions.

Published in Dawn, The Business and Finance Weekly, August 6th, 2018