When the Pakistan Stock Exchange provided returns of a stunning 46pc in 2016 — the highest returns on equity investments by any market across Asia — market participants and regulators moved about puffing their chest.

Brokers and analysts projected the Index would hit 56,000 points by Dec 2017, up another 8,300 points from Jan 1.

Good times continued to roll for the PSX well into 2017. On May 25, the benchmark KSE-100 index hit an intra-day all-time high at 53,124 points — upside of 11pc from Jan 1.

The rise and fall of the PSX has generated quite a lot of controversy. Who parented the stock market upheaval?

That marked the peak from which the index came crashing down. In just 16 trading sessions until last Friday, the Index has lost 6,265 points, representing an incredibly steep fall of 12pc.

The rise and fall of the PSX has generated quite a lot of controversy. Who parented the stock market boom and bust?

The boom

Incontrovertibly PSX stocks rose on the back of excitement created ahead of Pakistan’s reclassification into an MSCI Emerging market, from a Frontier Market. The inclusion was to be on June 1.

“We can expect a flow of between $300 million from passive investors/index funds over the next few days,” said Farid Khan, CEO of HBL Asset Management. And he was not alone in such a prognosis.

Estimates varied, but there was almost not a single person who had anything to do with stocks and the market went on record refuting the belief that the expected inflows were for real.

Even the PSX management made preparations and announced extra-time sessions to accommodate the heavy increase in activity on May 31 and June 01.

But as the trading drew to an end on March 31, investors were stunned to see net outflows of $81.7m. So what went wrong?

Scores of delegations of big brokerages, mutual funds, major listed companies and officials of PSX had trotted the globe, from Wall Street to Hong Kong, before June 01 to gauge the interest of MSCI passive funds in Pakistan.

It was on such feedback that every single person was enthusiastic over foreign inflows on the eve of Pakistan regrouping as an Emerging Market (EM).

No one had foreseen that Frontier Market Funds, which retain heavy investment of around $7 billion in the PSX, would go on a selling spree.

Topline Securities argued at the time, “Though Wednesday’s gross buying activity of $452m was in line with our expectations, it was overwhelmed by gross selling of $534m”.

That left the net foreign investment in negative by $81.7m. The benchmark KSE-100 index succumbed to a record single-day decline of 1,811 points, or 3.58 per cent.

Six companies had qualified for the main MSCI EM index: Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development Company and United Bank. EM passive funds were supposed to target those six.

In anticipation local market participants — mutual funds, banks, companies, stockbrokers and individuals began to build up positions.

They took the cue from the reaction seen in the Dubai and Qatar equity markets, which had received buy orders of $469m and $160m between the MSCI inclusion announcement on June 11, 2013 and the actual inclusion on June 1, 2014.

The bust

Local participants who had accumulated the six heavyweight stocks in anticipation of selling them to foreign funds at a higher price had carried market prices to unsustainable levels.

On May 25 at the height of the bull run, UBL stock was priced at Rs260; HBL at Rs305; Lucky Cement Rs962; OGDC Rs187; MCB at Rs247 and Engro Corporation at Rs399 a share.

As panic gripped the market on the complete lack of interest shown by EM Funds, local investors started to unwind their positions. In the process, the six stocks have seen a major rout.

By the close of trading on last Friday, UBL stock price had dropped to Rs222; HBL to Rs260; Lucky Cement to Rs826; OGDC to Rs141; MCB to Rs208 and Engro Corporation to Rs335.

Due to their heavy weightage of as much as 70pc in the KSE-100 index, they dragged the entire market down.

From its intra-day all-time high of 53,124 points on May 25, the KSE-100 index at the last closing last Friday plunged 6,265 points or 11.79pc. Stockbrokers who had accumulated mainly the six big shares but failed to sell-off on time were left holding the dirty end of stick.

Nasim Beg, vice chairman, Arif Habib Savings believes that brokers could influence the market in the past when there was ‘leverage’ trading, but no more. Another fund manager said that the international brokerage, Goldman Sachs, told them in informal chat that their clients required them to provide inventory from anticipatory buying.

Most market participants and even individual investors who were keeping to the sidelines said that political upheaval does cause fear in the minds of a change in government and inconsistency in economic policies.

But whether the present government stays or falls, the irrefutable fact is that everyone knows that stock markets all over the world hate uncertainty. There goes an adage: “For the market, uncertainty is worst than bad news”.

Published in Dawn, The Business and Finance Weekly, June 19th, 2017

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