AFTER countless autumns the Pakistan stock market has managed to act as the proverbial ‘barometer of the country’s economy’.

Emerging from the depths of despair, the market is now clawing its way up, trying to cover the ground it lost in its prolonged bear run over the last two years.

The country is fighting a looming balance of payments crisis. The national kitty is going dry and after the last count, the country’s Central Bank announced that the remaining foreign exchange reserves were sufficient only for seven weeks’ imports.

Prime Minister Imran Khan made no bones about the dire situation, declaring that the country was on the brink of bankruptcy and desperately needed dollars.

And so, for the second time, the country looked towards the friendly oil-rich Kingdom of Saudi Arabia for a bailout package. The prime minister and his team managed to cajole the Saudis into signing a financial assistance package.

At the heart of the investors’ excitement lies the nagging question: is this rally sustainable?

The news was greeted by a strong rally at Pakistan’s equity market. The stocks staged a spectacular rebound last Wednesday— the day following the announcement of the Saudi deal. The benchmark KSE-100 Index shot through the roof raking in 1,556 points (4.1 per cent), the highest gain in a single session in three-and-a-half years.

Pakistan Stock Exchange (PSX) CEO, Richard Morin, when asked to comment said that the bailout package from Saudi Arabia was a positive development for the bourse and the market was “right to react the way it did”.

A major brokerage house released a note stating: “Undoubtedly, the support package should truncate near-term pressures on the external account and should create an enabling environment for the government to tap other funding sources, such as Eurobond and Sukuk.”

Already in the last three days, investors have entered the stock market in droves, represented by the giant leap in number of shares traded.

On Friday, the last trading day, as many as 368 million shares changed hands, the heaviest volume since May 2017 — the height of a raging bull market and ahead of Pakistan’s entry into the MSCI Emerging Market (EM) Index.

Since Wednesday, excited investors have tossed the Index up by 2,841 points or 7.38pc and the market has recovered the Rs445 billion it had lost in market capitalisation.

But at the heart of the investors’ excitement lies the nagging question: is this rally sustainable?

Market gurus reckon that the sustainable performance of the bourse is contingent on financial commitments from China, while UAE is likely to chip in $1bn as well. Finance Minister Asad Umar disclosed that Pakistan was in need of up to $12bn in the short-term to fund the financing gap and restore the economy to some semblance of health.

The Prime Minister will head to Beijing in the first week of November. Hopes are high that the Chinese will follow Confucius’ line of thinking: “If you want happiness for a year, inherit a fortune. If you want happiness for a lifetime, help someone else.”

Pakistan urgently needs a financial package from China right after the Saudi deal having one can further reduce the amount that Islamabad will eventually need to borrow from the International Monetary Fund (IMF), putting the country at a stronger position to negotiate a soft-term package with the Fund.

Khurram Schehzad, CCO of JS Global, says that while negotiating with China Pakistan should consider a strategy in which China will reduce its deficit with Pakistan, swap trade in yuan, and make CPEC investments upfront. Pakistan can then go for a Diaspora Bond worth around $4-5bn for 10-years and beyond, in parallel.

As they seek a steady exit, foreign investors are partly responsible for the upheaval in Pakistan’s equity market: outflow from the stock market in July-Sept 2018 amounted to $186m.

Luckily, the influence of foreign investors has been diluted by mutual funds. Yasir Qadri, CEO of UBL Funds, one of the largest funds operating in the country with Rs75bn under its management, affirmed that mutual funds were retaining around 10pc cash. With stock trading at cheap multiples, mutual funds have poured in large amounts in the last three days to pick blue chips available at attractive valuations.

Ever since stocks started to melt a year-and-half ago, the country has been hit by either a ‘political’ or the economic’ crisis.

Arif Habib, a veteran broker and former chairman of the stock market says that the economic assistance from Saudi Arabia has helped dispel the clouds of uncertainty that were hovering over the market for the last several months.

“It provides a better view of the government’s plan to resolve the widening current account and fiscal deficit and to support the falling foreign exchange reserves, which in turn has created confidence in the hearts of the investors.”

But most analysts admit that the equity market is by no means out of the woods. There are several hurdles still to cross such as the gory prospect of being pushed out of the MSCI EM in the next half-yearly review in November.

Published in Dawn, The Business and Finance Weekly, October 29th, 2018