KARACHI: Monday saw a bloodbath on the trade floor as the benchmark KSE-100 index crashed by 1,900 points, the highest single-day decline.

The event brought back memories of Aug 15 last year when markets across Asia collapsed in the wake of an engineered depreciation in the Chinese yuan and the plunge of 4pc in Aug 2014 during the prolonged and chaotic protests and sit-ins in Islamabad. Since the start of the year, the benchmark KSE-100 index has lost 6.7pc of its value after a brief rally in the first few months.

Monday’s fall obliterated Rs327 billion in PSX market capitalisation. Moreover, 72 stocks hit their lower circuits — the maximum permissible decrease in any stock in a single session — as the trading board flashed red all over.

Major bleeding was seen in HBL (-5pc), UBL (-5pc), LUCK (-5pc), OGDC (-5pc), MCB (-5pc), Engro (-4.1pc), Hubco (-4.7pc), DGKC (-4.8pc), FFC (-4.1pc) and PSO (-4.8pc), which together contributed 881 points to the index fall.

Sector-wise, banks shed 496 points, cements 256 points, fertilisers 232 points, E&P 189 points and OMC 138 points.

Many dealers pointed towards rising political uncertainty as the reason behind the panic selling on Monday as the date of submission of JIT report on July 10 drew nearer.

But others with a more expansive view differed. “When we go through the numbers, mutual funds, insurance companies and banks have been net buyers,” says Arif Habib, referring to the sustained declines in recent weeks. He pointed to a few budgetary measures and net selling by foreigners and individuals as the main cause, before adding that JIT- related concerns “are a factor too”.

Another high net worth individual, who did not wish to be identified, pointed towards a few large redemptions in mutual funds, possibly by the textile industry. The reason for their pull back being the taxes imposed on mutual funds in the new budget. The data released by the National Clearing Company of Pakistan Limited (NCCPL) in the evening showed that among local participants, all others — banks, companies, insurance firms and individuals — were net buyers. Mutual funds were the lone net sellers of equity worth $8.7m.

“The exuberance caused by the expectations of foreign inflows of $400m on the entry of PSX into MSCI EM, had propelled KSE-100 index to 53,000 points from 44,000 points in a prolonged rally”, said one dealer, adding that as hopes turned to dust, big holders were now trimming positions while those with liquidity likely believed that the risk was too high for deployment.

Some dealers pointed out that the correction made valuations look attractive for long-term investors as the price-to-earnings multiple of PSX stood at 9.5 times forward earnings against average EM multiple of 12.5 times. But that observation had scant impact on sentiments.

Haroon Askari, acting Chief Executive Officer of PSX, said that he was not supposed to comment on day-to-day market performance, but assured that all risk management measures were in place and daily mark-to-market positions were smoothly settled. There are currently 407 Trading Rights Entitlement Certificate (TREC) holders with 235 active brokers.

The upcoming results season with expectations of higher corporate earnings and payouts failed to allay investors’ deepening concerns. Some suspected that the carnage was, at least in part, caused by the major investors and stockbrokers who went to liquidate their huge positions they had taken in six heavyweight MSCI Emerging Market eligible stocks.

Nasim Beg, Vice-Chairman, MCB-Arif Habib Investments that manages Rs70bn, thought that the decision of the regulator to ban in-house financing had saved the situation. “Small investors are no longer able to take speculative positions, that resulted in huge losses to them in the past when financing or ‘badla’ was available”.

Foreign investors bought stocks worth $4.9m on Monday. It caused just a slight change in foreigners’ sell-off of Pakistan stocks worth a huge $333m to-date in 2007 —nearly eight times the foreign outflows of $41m seen in the corresponding half year of 2016.

Published in Dawn, July 4th, 2017