No investor in Pakistan’s equity market should follow the old financial-world adage, “Sell in May and go away.” That’s because it would be suicidal.

The best time to quit was in late summer last year. The KSE-100 index stood at 42,425 points on Aug 20. By May 9, it had melted down to a three-year low of 34,888 points. This represents a staggering loss of 7,537 points or 18 per cent in almost nine months.

Investors in cyclical stocks, such as cement and steel, have seen their savings evaporate by 50-70pc. The crash of stock prices in the last eight and a half months cannot necessarily be linked to the performance of the PTI that came to power on Aug 18.

The slogan used in Bill Clinton’s first presidential campaign in 1992 — “It’s the economy, stupid” — has come to haunt the PTI government. Pakistan’s foreign exchange reserves, which stood at $7.2 billion in December 2018, had to be replenished quickly. The country managed to secure support of around $8.5bn from Saudi Arabia, United Arab Emirates and China. Thus, foreign exchange reserves regained some semblance of health with their level rising to $10.2bn by April 5.

But other indicators are still worrisome. Owing to the ongoing economic slowdown, the GDP growth rate is expected to be only 3.3pc for 2018-19, a steep fall from 5.2pc in the preceding year. The ambitious tax collection target of Rs4.39 trillion — which would be up 14.4pc from the preceding year’s collection of Rs3.8tr — will likely be missed. The tax body could collect only Rs3tr in the first 10 months of 2018-19, which is a multi-year low.

The interest rate hike by a whopping 475 basis points since January 2018, together with the rupee’s devaluation by 28.2pc since the beginning of last year, has given a crowning blow to corporate profitability.

“The unforeseen measures have put all forecasts of corporate-sector financials in disarray while the future quantum and value of sales and profitability are impossible to predict,” said Hameed Akhtar, chief financial officer at a major cement company.

The stock exchange has been held hostage by the ongoing negotiations with the International Monetary Fund (IMF) for a bailout package. First, the debate was whether to go to the IMF. Later on, the excruciating suspense about the conditions of the IMF package tested investors’ patience, which reflected in the long losing spell in the stock market.

In a recent report, Topline Securities stated that after the recent changes in key government positions, Pakistan can enter an IMF programme by June. “We expect the bailout package to be an Extended Fund Facility for a period of three years,” it said, noting that the size of the programme can be $10bn.

The government will take steps for fiscal, monetary and structural reforms in the next few weeks either before or in the 2019-20 budget. “These may include rupee devaluation, further hike in interest rates, increase in energy prices, elimination of subsidies and new and more taxes and aggressive privatisation among others,” the brokerage firm said.

Yet the finalisation of the IMF bailout package is not the only disconcerting issue that occupies the investors’ mind. The current month will have numerous events that can prove to be stumbling blocks for investors, forcing them to either stand on the sidelines or book profit. The events that can have a profound impact on the market include the MSCI review due on May 13, the Financial Action Task Force (FATF) meeting scheduled for May 14, monetary policy announcement on May 31 and the federal budget for 2019-20 expected in early June.

The outcomes of these events will determine the direction of the market. In the worst-case scenario, MSCI can downgrade Pakistan back to the Frontier Market Index from the Emerging Market Index. Investors fear that the FATF can keep Pakistan in the grey list or even put it on the black list.

Analysts believe that the IMF can demand a hike of 100-200 basis points in the interest rate in the upcoming monetary policy announcement. They say the 2019-20 budget will be harsh owing to the fiscal and monetary constraints besides the IMF’s tough conditions.

While the scare is across the market, foreign investors have been buyers of equities worth $46.5m from January to date. The market has also received support from banks, which took fresh positions in shares to the tune of $22.3m. Mutual funds have disposed of shares of $72.4m in the four months and 10 days of the current calendar year.

But a fund manager refutes the allegation that mutual funds have been the spoilers. “In this fiscal year so far, the mutual fund industry is 90pc invested in the stock market against the statutory requirement of 70pc,” he said, adding that asset managers generally retain 10pc cash to meet unexpected redemptions.

Published in Dawn, The Business and Finance Weekly, May 13th, 2019