During the last two years, Pakistan’s capital market witnessed several rallies following positive developments that helped its benchmark index reach the 42,000 level. It also saw losing streaks following negative developments including those related to Covid-19 and Financial Action Task Force that dragged the index down to 27,000 level.

When the PTI-led government took over in August 2018, the KSE-100 index stood at 42,446 points, representing a market capitalisation of around Rs 8.703 trillion. There was a large current account deficit, the rupee was losing value against major currencies and the exports were declining amid tough competition and wayward policies. The index reflected the difficulties and lost ground.

However, it responded to the measures taken by the government to reduce the current account deficit, improve revenue collection, bolster the foreign exchange reserves and seek an arrangement with the International Monetary Fund. As assistance from Asian Development Bank, World Bank, Islamic Development Bank and China Bank followed, the economy stabilised and the fact was visible in the KSE-100 index.

During the period under review the government received $9 billion assistance from Saudi Arabia, the United Arab Emirates and China. This helped it build up foreign exchange reserves.

The pressure of large debt payments resulted in the rupee losing nearly 35 percent of its value against US dollar. When the current government took over the rupee was trading at around 124.05 to a dollar which touched its peak in August 2020 at around Rs 168.43.

This drove the inflation rate which for months hovered at over 10 percent.

In 2018, the stock market declined for the second consecutive year, finishing down 8 percent. This represented a 22-year low for the bourse.

A decline in global financial markets and deteriorating macro-economic indicators brought pressure to bear on the KSE. Also, many investors remained sceptical due to a 400 basis points (or 4 percent) raise in the benchmark interest rate and depreciation of the currency.

For foreign investors, Pakistani equities remained one of the worst markets in 2018 as the benchmark KSE-100 index posted its worst performance for the decade in dollar terms, down 27 percent as dollar gained 26 percent against Pakistani rupee.

Compared to global equities, KSE-100 index stood out as the world’s 5th worst performing market in 2018, as per Bloomberg (based on total return), closing the year just 1 rank above world’s second largest economy (China) whose market (down 27 percent) saw an erosion of more than $2tn worth of market value.

The year 2019 was a tale of two halves; 1H2019 recorded a decline of 9 percent, followed by 2H2019 which witnessed a gain of 20 percent. The KSE-100 index recorded a bottom of 28,764 on August 16, 2019 (YTD decline of 22 percent).

Overall, the KSE-100 index recorded an increase of 10 percent in 2019 in rupee terms. The year had started with concerns over macro-economic stability, as the central bank continued with its restrictive policies into 2019 with a devaluation of the rupee by another 19 percent (PKR/USD touching 164 in June 2019) and a further increase in the policy rate by 3.25 percent to 13.25 percent (last rate hike in July 2019).

However, 2020 has been a totally different story for the global financial markets including Pakistan with the index touching a low of 27,627 points with a market capitalisation of Rs 5.356 trillion (a loss of Rs 3.4 trillion since August 2018).

For foreign investors, Pakistani equities remained one of the worst markets in 2018 as the benchmark KSE-100 index posted its worst performance for the decade in dollar terms, down 27 percent as dollar gained 26 percent against Pakistani rupee.

However, extraordinary measures have been taken by the government and the State Bank this year to support the economy. The interest rate has been slashed by 6.25 percent, restructuring of loans was allowed for around Rs 216 billion, about Rs 659 billion loans were deferred, about Rs 238 billion loans were approved for payment of wages and Rs 218 billion allowed for investments.

These measures, along with the strengthening of the rupee, a continuous flow of remittances ($2 billion per month for last five months) rise in exports, current account surplus (for the fifth month in a row) and healthy sales numbers of cement, steel and autos boosted the overall sentiment of the local bourse.

Yousuf Saeed, head of research at Darson Securities says, “Overall, the government’s performance has been satisfactory except in terms of controlling inflation and food prices, which we believe will have an adverse impact if not addressed on an urgent basis”.

All the indicators suggest that the economy is an expansion phase now and if the trends continue the rest of the tenure will be better.

“But focus is needed on improvement in education, health and justice. The government must also move to curb losses incurred by state-run institutions, making them profitable entities or privatising them,” says Yousuf Saeed.

During the last two years, the government taken some bold steps. These include its Ehsas Programme providing health insurance to up to a million people in Khyber Pukhtunkhwa and the Punjab and the continuation of the CPEC. Construction loans may prove a life time opportunity for those who want their own house, says Yousuf.

AA Soomro, the managing director at KASB Securities says, “Despite the recent run-up, the KSE-100 index continues trading at a 24 percent discount to levels witnessed in the previous bull cycle”.

The market is also trading at a significant discount to regional peers, trailing the MSCI EM multiple by 58 percent and the MSCI FM multiple by 53 percent, he says.

“In Pakistan’s case, cyclical stocks considerably outperform defensive plays during a bull cycle”, he says. “We believe cements, steel and automobiles are well equipped to capture the improving macro-economic backdrop and outperform the broader market”, Soomro adds.

Shankar Talreja, the deputy head of research at Topline Securities, says “The burning issue for the present government has been the resolution of circular debt”.

“Although the government has taken steps to negotiate returns with the IPPs, we believe that this would not be sufficient as root causes needs to be addressed with revamping of the policies.

“Discos continue to have transmission and distribution losses of 18-19 percent, higher than regional benchmark of 8-10 percent. Similarly, recovery in power sector has stood around at 90 percent which needs to be 100 percent”, he says. Both these issues require measures on war footing.

The author is a staff reporter for The News.