Political pressures start to show through on Pakistan stock market

KARACHI: Politics and investor nerves send Pakistan Stock Exchange (PSX) to its first half yearly loss in many years as the benchmark index posted a negative return of 2.6 percent, under-performing on both Frontiers Market (FM) and Emerging Market (EM) indices of MSCI, analysts said on Saturday.

The MSCI EM and FM indices returned 17.6 percent and 12.6 percent, respectively, during the half year.

Growing uncertainty over investigation against the prime minister in Panama corruption case is starting to have an impact in terms of how risky the country’s stock market is perceived by investors. “Bulk of the sell-off was seen in June alone, the worst June since 1999 and worst month since March 2015, with the index crashing 8 percent due to a plethora of negative news and events that missed expectations,” Adnan Sami said in a report issued by Topline Securities.

The KSE-100 shares index shed 2.6 percent in the half-year to close at 46,565.29 points. KSE-30 shares index sheds 5.9 percent during the period to close at 24,250.84 points. For the fiscal year ended June 30, 2017, the KSE-100 shares index gave a return of 23 percent as compared to the return of 10 percent in the fiscal year ended June 30, 2016.

The industry believes Pakistan would witness inflows of $300 to$500 million; following upgradation to the MSCI-EM index, but when the day finally came, there was an outflow of $82 million.

Pakistan’s weight in the MSCI-EM is 0.14 percent. This is much smaller than Pakistan’s weight in MSCI-FM Index, which was nine percent. “This had a humbling effect on all the market participants, causing market sentiments, outlook and performance to take a U-turn,” Sami added.

The government announced FY18 federal budget, excluding key proposals from the Pakistan Stock Exchang, while tightening up tax measures on investors and companies alike. Then there’s the political overhang, with the country’s prime minister facing investigation in the infamous Panama Leaks and the political and media circus arising from it.

Foreigners remained net sellers during the half-year ended June 30, 2017 with the quantum growing over sevenfold, as they offloaded positions worth $333 million as compared to the net outflow of $41 million during the same period of the last year.“We believe selling is likely to be amplified due to political and economic concerns,” the Topline report said.

Average daily volumes in the ready market stood at 315 million shares/day, up 72 percent as compared to 182 million shares/day last year.

“Surge in traded value was due to increased activity in the blue-chips, amplified by the MSCI upgrade,” the report added.

On the local front, mutual funds provided major liquidity, buying up equities worth $268 million, while insurance companies also supported with inflows of $128 million. Individuals and banks remained sellers, offloading exposures worth $77 million and $73 million, respectively.

Analysts believe the top concerns for investors right now are the Panama case and external account deterioration. Until the JIT’s final report and subsequent decision by the Supreme Court, the market will likely to remain subdued, they added.

However, an early resolution would be amicable for all stakeholders, as in fact, uncertainty is worse than the event itself.

Meanwhile, the outlook on Pakistan’s external account situation is deteriorating as the current account deficit during the 10 months of the fiscal year surged $8.9 billion, up from $3.2 billion last year, which is a nine-year high and is raising concerns of potential sharp currency depreciation.