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Stocks under political cloud

June 25, 2012

SHARES at the Karachi Stock Market remained under pressure for almost the whole week, mainly on the fast changing scenario on the political front.

While retail investors remained on sidelines, believing discretion to be better part of valour, even the institutional activity dimmed, drying up liquidity in the market.

The KSE took the disqualification of Prime Minister Yousuf Raza Gilani, in stride on the first day following the episode, the KSE-100 index settling after an insignificant loss of 15.81 points. The market sank for three days that followed though a late rally on Friday helped erase the earlier losses and convert them to a gain of 65 points or 0.6 per cent over the earlier week.

The benchmark KSE-100 index settled at 13,731 points. Lack of activity resulted in a big fall in average trading volumes, which stood at 69 million shares, down by a significant 20 per cent over the earlier week’s average of 86.4 million shares. The volumes had been on the slide with average being 95 million shares, the week before the last.

Foreign investors in equities also remained cautious and disposed of shares worth $6.3 million in the outgoing week. Traders said that foreign fund managers’ decision to offload stocks triggered larger sell-off from local participants as well. The foreign portfolio outflow last week had amounted to $83.6 million but that included one-off payment for acquisition of strategic 200 million shares of Hubco by the local conglomerate.

Excluding the Hubco sale proceeds, the foreigners had sold $17.6 million worth equity during the week. The exodus of foreigners was said to be triggered by rapid erosion in value of the rupee. An equity dealer pointed out that foreigners’ fear over the rupee fall was exacerbated by sell-off in regional markets.

Analysts said foreign investors also remained net sellers in the outgoing week, withdrawing $6.3 million from the bourse on lack of progress on Pakistan-US dialogue and strongly worded statements from US officials.

The dismissal of Prime Minister Yousuf Raza Gilani raised nagging worries in the minds of investors whether the Presidential Ordinance of April 12 that granted immunity to the disclosure of source of funds invested in the stock market for two years until June 2014, and the already made part of the Finance Bill 2012, would remain or the questions of its validity resurface, due to the disqualification of the PM since April 26, many weeks before the passage of Finance Bill.

However, some legal experts said legislative decisions (including the budget) would likely be given constitutional cover in the detailed judgment of the Supreme Court, and the administrative measures could be annulled. In this regard, the detailed verdict is awaited and the possibility remained that legal cover may be provided to the Finance Act FY13 given that it was approved by the Parliament. Yet all of that was wrapped in uncertainty.

During the week, KSE notified a decision to transfer current benchmark KSE-100 index to a free float based index (w.e.f 1st Oct) from current market cap-based methodology in order to curb the impact of low liquid stocks. Meanwhile, MSCI’s annual review was slightly disappointing as the position of Pakistan’s stock market was kept unchanged.

Analyst Furqan Ayub at the JS Global related the economic picture: The current account deficit in May-12 was reported at $414 million, while the eleven-month 2012 current account deficit (CAD) registered at $3.77 billion as against a meagre deficit of $79 million reported in the same period last year. Foreign direct inflows (FDI) in the same period had also been disappointing with Net foreign investment dipping by 61 per cent to $721 million in 11MFY12. The fall came on the back of energy crises and law and order situation.

Mohammad Rizwan, at the Topline Securities observed that with the rising political uncertainty and the closing of accounts for financial year to June next week, lacklustre activity was witnessed in the stock market during the week.—Dilawar Hussain