IN the first nine trading days following the Pulwama incident of Feb 14, Pakistan’s stock market fell five per cent and remained volatile until the last two days of the outgoing week.

Overall, during the month of February, the KSE-100 Index sank 1,744 points portraying a negative return of 4.7pc which brought to an end the investors’ jubilation over the positive return of 10.1pc recorded in January.

A major reason for the negative performance of the bourse was the heightened tension with India leading towards border intrusions and skirmishes along the Line of Control in the second half of the month.

Investors gave in to panic selling of stocks and ran to seek the safety of the money market, gold and fixed income securities.

Topline Securities has analysed market behaviour during the five major Pakistan-India conflicts between 1999 and 2016. They include the Kargil conflict, attack on Indian Parliament, Kaluchak massacre; Pathankot attack and the Uri strike.

Among them the market took a major blow during the Kargil conflict in May-July of 1999 when the KSE-100 Index lost 31pc in 10 trading sessions after hostilities broke out and rebounded 5pc in the next two sessions after the US intervention.

Investors gave in to a panic selling of stocks and ran to seek the safety of the money market, gold and fixed income securities. Analysts fear that in the event of a war, regulators will be forced to close down the market

“As per our analysis of the above events, Pakistan’s market historically falls on average by 3-4pc, with minimum [fall of] zero per cent (Uri strike) and maximum [fall of] 31pc (the Kargil conflict),” says the Topline analysts.

Analysts fear that in the event of a war, regulators will be forced to close down the market. The previous two such occasions — 1965 and 1971 — are not comparable with today’s market which is now capitalised at Rs8 trillion with 558 listed companies.

Up until the government threw open the doors to foreign investors in the early nineties, the then Karachi Stock Exchange was a sleepy place with a few score listed companies and market capitalisation of as many billions of rupees as could be counted on the fingertips of both hands.

So insignificant was the country’s share market that it was the norm until around 1986 to declare the market closed in the midst of trading to mourn the death of a retired stock broker.

But how did Wall Street survive when the whole world was at war? During World War I, the New York Stock Exchange was closed between July 30 and Dec 12 of 1914. Although stocks could not be traded on the main exchanges, over-the-counter markets replaced the exchanges for investors who were desperate enough to sell.

But by World War II, the markets had learned their lesson. When it began, the London Stock Exchange closed for only a week, while the New York Stock Exchange remained open for trading all through the War.

An old timer muses that during the market meltdown in 2008, to arrest the fall in stock prices which had plunged by almost 55pc in four months, the regulators of the Pakistan stock market performed an entirely insane act.

On Aug 20, 2008, a ‘floor’ was fixed at the level of 9,144 points below which the index was not allowed to fall. All investors, including foreigners who wanted to seek an exit, were trapped. The market is still licking the wounds of the consequences that followed the fixing of the ‘floor’.

The Pakistan market was shunned by foreign investors for a long time and MSCI relegated the Pakistan benchmark Index from ‘Emerging Market’ to ‘Frontier Market’, from where the country has only recently managed to return.

“Closure of the market, therefore, in any eventuality does not seem to be an option,” said this retired broker.

Most analysts are putting their bets on a de-escalation of hostilities between the two countries following the developments late last week. Stock market behaviour in the last two sessions when the KSE-100 Index rebounded by over 3pc also suggests that the investor’s fear of even a limited war may have subsided.

After watching silently for several days, the international community seems to have realised the gravity of the situation in case of an intensified conflict between two nuclear armed states and has urged both countries to de-escalate hostilities.

Prime Minister Imran Khan reiterated his wish for peace with India and offered yet again to investigate India’s claims regarding the Pulwama incident. It was followed by India’s Minister of External Affairs Sushma Swaraj, while on a visit to China, saying that India did not want to escalate tensions.

Pakistan also released the captured Indian pilot as a first step in an attempt to open negotiations.

Analysts are now putting forward three scenarios: No further escalation, with things settling down in a few days owing to international intervention. Second, the sounding of war drums until the Indian general elections in April-May 2019, and third, skirmishes resulting in further sordid events as happened during the Kargil conflict.

Although the dust is yet to settle, most market gurus are hoping and praying that things will not deteriorate to the third case scenario for that will hammer shares, inflicting severe damage to investors already reeling under huge losses since May 2017.

Published in Dawn, The Business and Finance Weekly, March 4th, 2019