IF those who invest in Pakistani stocks are ruffled and glum-faced on the eve of the new year, they have good reason to be, as much went wrong during the outgoing year.

Unlike at the end of 2016 when brokers and investors were dancing with glee on having made fortunes owing to a mouth-watering return of 44 per cent on their investment — highest among Asian markets and second best in the world — investors in the local bourse are staring at a negative return of 15.3pc in 2017.

The benchmark KSE-100 index of the Pakistan Stock Exchange (PSX) sank 7,335.49 points during 2017 to close the year at 40,471.48 points. Misfortune befell late entrants into the market for they lost more than a quarter of their savings as the stocks started to tumble from May 25 when the index peaked at 52,876 points.

The reversal that the stock market took in mid-May stunned even the best analysts. Overjoyed by the performance in 2016, the top pundits were predicting the KSE-100 index to cross 62,000 points in 2017.

But such hopes were dashed to dust, for the market has a mind of its own.

Not many people take Warren Buffett’s warnings seriously who once told shareholders: “Anything can happen anytime in markets. And no adviser, economist, or TV commentator — and definitely not Charlie nor I — can tell you when chaos will occur.”

And the chaos in the Pakistan stock market occurred with the announcement of the budget 2017-18, which burdened equity investment with new taxes. It was followed by the debacle of Pakistan’s relocation to MSCI’s emerging-market index from the frontier-market category.

Regulators, fund managers, institutional and individual investors had exhausted all the cash in buying stocks that they were sure foreign investors would swoop in to add to their portfolios once the Pakistani bourse was upgraded. That, however, was not to be as the market witnessed heavy outflows instead of the expected inflows.

Then, in the last six months of the year, the country was embroiled in political and economic uncertainties, which refused to provide respite to the market.

The positivism of big brokers and equity strategists has been sparked by the clarity on the political front, which for most of 2017 was shrouded in uncertainty

But optimists are looking at the turn of the tide in 2018. Brokerage JS Global observed in its strategy report: “We expect the market to pare most of the losses of 2017 in 2018 by setting December 2018 index target of KSE-100 index at 47,000 points.” However, the report said the returns are likely to be skewed towards the second half of 2018, when “we expect clarity on domestic politics and economic policies to emerge”.

Topline Securities believed that Pakistan’s price-to-earnings ratio could potentially be in the range of 8.5-9 times by the end of 2018, providing 22pc to 29pc upside from current levels.

PSX chairman Muneer Kamal affirmed that the market had all the reasons to rebound. He asserted that the overall direction of the economy was on track including growth rate, inflation and interest rates.

“Yes, there are issues with the current account deficit,” he said, but he argued that those could be overcome.

Following the rupee devaluation, the Pakistani market would be back on the foreign fund managers’ radar due to its attractive valuations, he said.

“There is every likelihood of emerging-market foreign flows in 2018,” Mr Kamal, who is also the SECP-nominated director on the bourses’ board, said, adding that that with sizeable free-float held by foreign investors, their entry could turn the market around and boost the confidence of local investors.

He said mutual funds, banks and foreign investors (with 30pc Chinese investors’ stake in the market) would all be anxious to set a positive direction for the market.

The optimism of big brokers and equity strategists has been sparked by the turn of tide on the political front, which for most of 2017 was shrouded in uncertainty.

After five weeks of battering, stocks gained over 2pc in the week preceding the one before the close of the year as the passage of an important bill by the Senate dispelled doubts about elections being held on time and the briefing of the Army chief to the Senate comforted investors that the democratic process was not to be derailed.

Arif Habib, a former chairman of the stock exchange, concurred with the views of Mr Kamal, stating that the outlook for the market in 2018 was positive with the hope that reasonable returns would be netted by investors.

He thought there could be an uptick in interest rates which might leave a healthy impact on banks’ bottom lines.

The devaluation of the rupee may help reduce pressure on the external account; it is likely to give a boost to exports and import-substitution industries. Since the power sector and exploration and production receive dollar-based returns, their earnings could also increase.

Many market experts do not subscribe to the story of an imminent rally. They contend that the KSE-100 index may continue to move sideways until the elections.

A Topline analyst, however, displays charts and graphs to show that in the last 25 years, Pakistan’s equities have always surged by 12-22pc on an average in three- to six-month period prior to the elections.

Published in Dawn, The Business and Finance Weekly, January 1st, 2018