The uncertainty that plagues the stock market is evident from the fact that twice in April, KSE-100 index hit rock bottom. The second time was last Wednesday when the indexspiralled downwards by 498 points and hit a three-year low at 36,404 points. The index was last seen at this level on May 31, 2016.

Investors are at a high pitch of anxiety for they feel that they have been left to fend for themselves. Hope for a stock market support fund, which was expected to be launched before the next MSCI emerging market review scheduled for May 13, has faded.

Institutions that were supposed to be roped in to create a support fund of Rs40 billion are cool as a cucumber. Market pundits are at a loss to determine if major institutions, including State Life Insurance Corporation of Pakistan, Employees Old-Age befit Institution (EOBI), National Investment Trust, and National Bank of Pakistan are fully invested—less in equity and more in money market and government instruments—or they are still sitting on a heap of cash.

A major stock broker was furious, pointing out the fact that these institutions are unwilling to pick up energy stocks at the incredibly low price-to-earnings multiple of 4 times the forward earnings. This is a conspiracy to defame the present government, he said.

The most disconcerting issue at the moment is the International Monetary Fund (IMF) three-year bailout package

But most independent analysts do not subscribe to that view. “It is impossible to say when a stock market will bottom out”, asserted a fund manager. No one will be willing to put their investors’ money at incalculable risk, he added.

The most disconcerting issue at the moment is the International Monetary Fund (IMF) three-year bailout package. The talks that started with the IMF mission in Pakistan from Nov 7, 2018 still remain inconclusive.

Economists such as Dr.Hafiz Pasha and others do not seem to endorse the loan modalities already discussed by the former finance minister, Asad Umar, who had been negotiating with the IMF mission.

Investors are now spooked by the status of the talks. Questions arise regarding whether the bailout package will be delayed, the $6-8bn being negotiated will be sufficient, and above all what would be the conditions on which the IMF puts cash on the table.

A stock broker, known to be a value investor, told Dawn that the market is eagerly waiting to see if the international lender has asked for further devaluation of the rupee, more monetary tightening and possible hikes in gas and electricity prices. Investors are also dreading heavy additional taxes in the upcoming budget to address fiscal concerns, he added.

“So much uncertainty makes it difficult for corporations and investors to forecast the impact on profitability of companies in the next several quarters, which in turn makes price discovery of a stock impossible”, he said.

Much of the liquidity is therefore flowing back to safe havens. Banks, fixed return assets and National Savings Schemes provide risk-free double digit returns.

There are other sobering thoughts: Pakistan is doddering at the edge of a cliff that could push it to Financial Action Task Force’s (FATF) black list. But a major market player argued that the fear of FATF was exaggerated.

“In case of an unfavourable decision, it would have an adverse impact mainly on the banking sector where banks’ earnings may be hit by intensified surveillance,” he said.

There are mixed views in the event that the MSCI downgrades Pakistan to Frontier Market (FM), from the current place of Emerging Market (EM). Pakistan has just three stocks and almost negligible weight in the EM.

On the other hand, the weight in FM would be considerably higher, which optimists expect could put Pakistan back on the investment radar of international passive funds.

It is ironic that brokers and investors who were pining to be lifted out of FM into EM in May 2017 — which propelled the KSE-100 Index to its all-time high of 53,124 points — are now advocating the merits of being in FM.

Mutual funds are currently leading the sell-off, partly to save their capital protected funds and partly to fund redemptions. Foreign investors have swooped in to buy, relishing the ‘blood on the street’.

Local institutions are generally remaining on the sidelines but panic struck individual investors are throwing away what little is left of their holdings. Going forward the prognosis of the market is far from satisfactory.

No one can second-guess the market but most knowledgeable players admit that things can get worse before they get better. Some visualise gloom and doom for another six months to a year, before things start to look up.

Published in Dawn, The Business and Finance Weekly, April 29th, 2019


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