KARACHI: The stock market is in the third year of losses as the prices of shares all across the board fall like ninepins. On Wednesday, the meltdown continued with the KSE-Index sinking by 550 points, dragging the index to settle at the end of day’s trading at three-year low 36,579 points.

From its peak on May 25, 2017 at 53,124 points, the benchmark KSE-100 Index has tanked by 16,545 points (31 per cent) — showing that almost a third of the investors’ savings have been wiped off. The market capitalisation of the Pakistan Stock Exchange has eroded by a staggering Rs3 trillion — from Rs10.5tr to Rs7.5tr in the same time period.

Until the elections in July 2018, it was the political uncertainty that weighed on the minds of investors, but following the arrival of the new government, the market has been plagued by disturbing economic numbers. The reserves have continued to deplete with the government scraping the barrel and the fiscal side remains a major cause of concern.

Fear stalks the market as investors keenly await outcome of IMF talks, next budget

An Asian Development Bank (ADB) report released last week painted a grim picture of the economy, saying Pakistan would continue to face macroeconomic challenges despite tight fiscal and monetary policies to rein in twin deficits leading to deceleration of the GDP to 3.9pc during the ongoing fiscal year.

The International Monetary Fund this week projected the average growth rate for the Pakistan economy at 2.5pc over the next five years in the absence of a fund programme, which analysts said was the lowest economic growth rate projected by any multilateral lender.

Finance Minister Asad Umar announced last week that the country had to choose between the devil and the deep blue sea. He declared that the country had two options — “either go to the IMF or go bankrupt” — which further exacerbated the investors’ fears. As the market tumbled following the finance minister’s statement, one market guru observed that since the market was “10pc economics and 90pc psychology”, confidence needed to be created in the minds of the investors so that they could see the future with more clarity.

Although some market experts pin hopes on a pro-industry upcoming federal budget, traders and market strategists dread that things will get worse before they get better.

The State Bank discount rates have spiked to 10.75pc and the central bank is feared to further tighten the monetary policy. The rupee has depreciated by over 35pc. The CPI data for March is at 9.41pc, representing the highest monthly inflation figure in five years.

The country is at the mercy of the Financial Action Task Force (FATF) and struggling to avoid being placed on the black list which would be a disaster. Foreign investors have been sellers of equity worth $1.6 billion in the last three years and the outflow continues. Investors are also spooked by the Morgan Stanley Capital International’s possible decision in its next June review to downgrade Pakistan from Emerging Market to Frontier Market as the Pakistan Index weight in the EM drops to 0.03pc from 0.16pc.

Read: FATF action plan

Former bourse chairman Arif Habib tells Dawn that he considers the cheap valuations of Pakistani stocks as an opportunity to buy. “In spite of the economic slowdown, except for a few sectors like cements, steels and automobiles, companies in the business of fertiliser, banking, power and oil & gas exploration and production are doing well,” he says.

Yet the investors are pulling out of the equity market and seeking the safety of fixed income securities such as the National Saving Schemes, money market, dollar and gold. Most institutional investors usually stay on the sidelines, giving rise to an anaemic average traded value of shares at just around Rs3bn, from Rs20bn a few years ago. Due to the incessant market fall, the initial public offering (IPO) market has dried up as potential entrants have put their plans on hold, fearful of under-subscription.

Many brokers have closed shop, while tales of broker defaults are also circulating. Mutual funds fear runaway redemptions. Going forward, market experts say that the direction of the market will be determined by the outcome of talks with the IMF and the upcoming federal budget.

Published in Dawn, April 11th, 2019