Stock brokers, corporate sponsors and investors sat listening in disbelief as Finance Minister Miftah Ismail announced a multitude of surprises in the budget announcement last week.

The surprise bounties of reduction in corporate tax and super tax culminated in the exemption of tax at five per cent on bonus shares — first levied in the FY15 Bill.

The removal of the levy was a major demand of the Pakistan Stock Exchange (PSX), one it had pursued in all its budget proposals since the tax’s inception. But the government had adamantly looked the other way.

This time around though, the wish was granted. The package for the capital market was loaded with tax incentives and exemptions. The PSX could have scarcely asked for more.

That evening brokerage houses burnt the mid-night oil in order to be the first to prepare joyous reports and dispatch them to their overseas clients. From the top broker to the retail investor, everyone showered praises on the day-old Finance Minister for offering a “market friendly” budget.

A massive rally when the market would open after the budget was a foregone conclusion. Arguments were on how high the bulls would toss the benchmark KSE-100 Index on the first day. “I wagered 800 points gains for last Monday alone”, admitted a floor trader.

Market gurus are at a loss to understand market behaviour. The one reason that seems to make sense is that investors are spooked by the deteriorating economic numbers and uncertainty on the political front

But that was not to be. For the third time since May 2017, the market outwitted investors. On the first day’s trading, post-budget announcement, the index opened in the positive but soon succumbed to selling pressure.

Investors gasped for breath as the Index turned south and the market closed with a loss of 54 points. Losses extended by 292 points the next day and accelerated to a decline of 450 points last Thursday. In three trading sessions following the budget the Index has already lost 796 points or 1.76pc of the value.

On the first day, foreign investors followed the adage: “buy when there is blood on the streets” and swooped to purchase net $6.10 million worth of equity; but disposed off $4.24m worth shares in the next two days.

Market gurus are at a loss to understand market behaviour. The one reason that seems to make sense is that investors are spooked by the deteriorating economic numbers and uncertainty on the political front.

Chairman PSX Muneer Kamal when asked why the market had brushed all incentives aside said that he himself was surprised over the unexpected. He mused that it had more to do with investor sentiments than fundamentals. “Perhaps investors have decided to wait and see before taking the plunge”, he said.

Nasim Beg, vice chairman MCB-Arif Habib Savings also conceded that investors’ poor response to the budget was surprising. He affirmed that no one had expected the super tax to be phased out, which the budget had done with other incentives such as lowering corporate tax rates and allowing issuance of bonus shares.

He thought investors may have held inventory before the budget announcement which they were now throwing in the market.

A corporate head said that both sponsors and shareholders should be happy over the slashing of the payout requirement to 20pc from 40pc of after tax profit for companies as it would help corporate cash flows and strengthen balance sheets.

There were few measures, such as non restoration of slab-wise regime of Capital Gains Tax (CGT) and the status quo on tax on cash dividends, which could have disappointed investors, but in the face of major incentives these had hardly the weight to drag the entire market down.

Meanwhile, the PSX Stockbrokers Association proclaimed on April 30 that the budget was a disappointment as “most of its proposals had been ignored”.

The frequent changes in the CGT regime had hurt investor confidence. “The tax paid dividend continues to be taxed at a higher rate without taking into account that the dividend is distributed out of the tax paid income of the listed companies” the Association stated.

It claimed that the removal of slab wise charge of CGT according to holding period had resulted in a lower collection of just Rs1 billion against collection of Rs18bn the earlier year.

But after all is said and done, no one can figure out why calculations of almost the entire market on three major issues since May 25, 2017, when the KSE-100 Index touched its peak, went haywire.

The first dramatic event was the net outflow on Pakistan’s inclusion in MSCI Emerging Market against the consensus view of huge inflows in May last year; second contrary to expectations foreigners’ showed disinterest in Pakistani equities despite the nine per cent devaluation of the rupee against the dollar and finally the investors’ sell-off regardless the generous incentives and tax exemptions in the budget 2018-19.

Published in Dawn, The Business and Finance Weekly, May 7th, 2018