THE capital market has been on a roller coaster ride in the 65 trading sessions since the incumbent prime minister took oath of office. As it were, the traders hadn’t been raking in money hand over fist prior to the installation of the PTI government.

From Aug 17 to Nov 22, the KSE-100 Index has drifted down by 1,573 points or 3.8 per cent. The benchmark closed last Thursday at 40,874 points, from 42,447 points at the start of the era of the present government.

While politically, the government has been pretty comfortable, the economy remains in the eye of the storm. The government has had to grapple with fast depleting foreign exchange reserves and ever-widening deficits.

Incidentally, the two worst and best sessions followed each other in quick succession the previous month.

Investors were spooked due to uncertainty, which is considered worse than bad news

On Oct 8, heavy sell-off by both local and foreign investors saw the KSE-100 index cave-in by 1,328 points (3.39pc), the highest single day drop in 15 months, dragging the benchmark to close at 37,898 points — lowest in 10 months. Around Rs244 billion ($2bn) was wiped out of market capitalisation in a single day.

Traders and senior market participants agreed the fuel that fired selling was the confusion regarding Pakistan’s entry into the International Monetary Fund programme (IMF), about which mixed signals were being flashed.

Investors were spooked due to ‘uncertainty’ which, at the Wall Street, is still regarded as worse than ‘bad news’. The State Bank of Pakistan’s weekly data that week unveiled foreign exchange reserves at $8.3bn, standing at almost a four-year low.

But the market stabilised quickly and on the 24th of the same month, the stocks staged a spectacular rally to clock in gains of 1,556 points (4.1pc). The stock index surge represented the highest gain in a single session in three-and-a-half years. The bourse managed to add Rs254bn to its market capitalisation.

The development that put the market on fire was the Saudi government’s consent to lend a helping hand in fending off the looming balance of payments crisis faced by Pakistan.

To the visiting Pakistani prime minister, the Saudi government promised financial assistance of $3bn in deferred oil payment and another $3bn in support of foreign exchange reserves.

Pakistan Stock Exchange CEO Richard Morin stated that it was a very positive development for the bourse and the market was ‘right to react the way it did’.

The two worst and best sessions followed each other in quick succession the previous month

Clarity on the government’s plan to resolve the economic situation created confidence in both individual and institutional investors who entered in droves to build short- and long-term positions in blue-chip stocks available at attractive valuations.

But the euphoria proved short-lived as contrary to expectations, a similarly large financial assistance package from China and UAE did not immediately materialise and the government finally decided to enter the IMF programme.

The negativity deepened as the MSCI Semi-Annual Index Review results announced on Nov 13, downgraded two stocks of the five in MSCI Emerging Market to Small Cap Index.

While the modalities of Chinese assistance to Pakistan are currently being worked out, a stalemate has occurred in policy level talks with the IMF, which laid out harsh conditions for a bailout package.

The global lender asks for an increase in revenue collection target by 19pc, flexibility of rupee against the dollar, double digit interest rates, increase in power tariff by 20pc and an audit of each taxpayer. Along with that, the IMF asked for all details of the country’s financial deals with China. The conditions are unacceptable to Pakistan and so the talks are in disarray.

Senior broker and the former chairman of the local stock exchange, Arif Habib says that initially investors raised their expectations too high regarding financial assistance from several friendly countries.

Although he does not rule out a surprise package from China or UAE, Mr Habib laments the lack of ‘clarity’ on these and a final decision on the IMF deal. “Clarity on these issues will end speculation in the market and encourage even long-term investors to take fresh positions,” he says.

Other market observers hold similar views: “Going forward, a successful agreement on the IMF loan facility, discussions of which have been deferred, would remain a key point in investors’ interest. Any prospective inflow from China and UAE to support the balance of payments crisis could further entrench investor confidence on the country’s economy,” says Muhammad Fawad Khan, executive director, research and business development at brokerage BMA Capital Management.

Published in Dawn, The Business and Finance Weekly, November 26th, 2018

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