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Stocks take Sharif’s ouster in stride

Investors heaved a sigh of relief as the ex PM's departure brought an end to prolonged uncertainty over his fate.
Updated Aug 08, 2017 01:46pm

If stockbrokers and investors in the trading hall of the Pakistan Stock Exchange (PSX) celebrated the ouster of former prime minister Nawaz Sharif on July 28, they had nothing personal against him.

The prolonged uncertainty over the fate of the former prime minister had taken its toll on the market.

On May 25 the KSE-100 index hit a peak of 53,123 points, but then remained on a slippery slope.

By July 28, when the Supreme Court finally unfolded its judgment, the index had sunk to 45,912 points, depicting a loss of 7,211 points, or 14pc, from its all-time high level.

“But that relates only to the stocks that form the KSE-100 index shares,” said a stockbroker.

He explained that two classes of investors had badly burnt their fingers: those who kept pouring money into overvalued, heavyweight scrips eligible to be included in the MSCI emerging-market (EM) index, and the small investors with little means who jumped on the bandwagon to accumulate, again, overvalued, second-tier stocks.

Both those categories of shares had lost between 20pc and 40pc of their price.

Yet, in just four trading sessions after Mr Sharif’s ouster, the KSE-100 index clawed back by more than 1,000 points to cross 47,000 on Thursday.

Even if the departure of the ex-premier was bad news, investors heaved a sigh of relief since uncertainty, they say at the market, is worse than bad news

Past events suggest that the stock market has prospered during the PML-N regime since the image of Mr Sharif, himself an industrialist, as the leader of a business-friendly government is deeply embedded in stockholders’ minds.

Ironically, the market had also celebrated the PML-N victory in the last general elections with the same furore.

But uncertainty, they say at the market, is worse than bad news. So even if the departure of Mr Sharif was bad news, investors heaved a sigh of relief.

On that fateful Friday (when Mr Sharif was disqualified), the KSE-100 index sank by 1,670 points, or 3.6pc, early in the day before the announcement of the verdict.But in the second half, investors, realising that the worst may be over, fell over one another in cherry-picking heavily undervalued stocks, pulling the index out of the red.

The PSX, which stood out as the best performing market in Asia in 2016 by giving out a return of 46pc, fell upon bad times at the dawn of 2017.

First, it was the federal budget. The government set aside the budget proposals presented by the PSX.

The three principal measures included in it were the rationalisation of the period of holdings for levy of Capital Gains Tax (CGT), waiver of tax on dividend in the hands of shareholders and abolition of tax on bonus shares.

The budget, in contrast, decreed increase of tax on dividend to 15pc from 12.5pc while ignoring the issue of tax on bonus shares, and abolished the concept of holding period slabs for calculation of CGT, which would now be levied at a flat rate of 15pc.

All through the month of May, the madness in the market was without method as investors continued to build positions in preparation for the country’s re-entry into the MSCI EM index.

Everyone believed this would unleash a wave of investment from EM passive funds in the PSX.

Estimates ran up to $500m of incoming funds in the first few days.

But May 31 turned out to be a huge disappointment as all preparations by the stock market to accommodate funds went in vain.

Investors watched in disbelief as, in contrast to an inflow, the market saw foreign outflows.

Those who had poured money in six heavyweight MSCI EM-eligible stocks were badly trapped.

Then again on July 11, with no viable solution to the political impasse over the Panama Papers case, the KSE-100 index tanked 2,153 points, or 4.65pc — the biggest single-day decline in terms of points.

Investors started panic-selling in the lead of mutual funds, which sold equity worth $11.6m.

Yet, the market managed to stage a rally of 1,052 points the very next day, recovering about a half of the value lost a day earlier.

While all local and foreign participants — including individuals and institutions such as banks, corporates and insurance companies extended their selling spree — mutual funds absorbed all of the sell-off with net buying of $15.3m worth of stocks.

With assets under management of Rs650bn under an aggregate 219 funds, the mutual funds industry has come to dominate other participants and dictate the direction of the market.

Foreign investors, meanwhile, followed the old market maxim: “The time to buy is when there’s blood in the streets.”

Like vultures they swooped on fallen corpses to lap up heavyweights that had attained attractive valuations following consistent bleeding since their peak on May 25.

Finally, it has to be noted that Pakistan’s equity market, which has grown to be valued at around Rs10 trillion, stood out as low capitalised and isolated until the start of the current decade.

But it has now matured enough to be affected by internal and external events.

A decade ago, one could see business as usual with market even taking a climb, regardless of bomb blasts in the city.

Global events such as the price of coal now impacts, say, the cement shares while the fluctuations in the price of crude sets the direction of the PSX’s largest sector by market capitalisation, i.e. oil and gas.

Published in Dawn, The Business and Finance Weekly, August 7th, 2017