For the market, Uncertainty is worse than bad news

When it comes to Pakistan, there is no better word to describe it than ‘unpredictable’. No stranger to ups and downs, whether its sports, politics or any other domain, the charts of this country are always in a frenzy. However, of late, Pakistan’s financial markets has been quite a focal point for the world. Since the birth of the Pakistan Stock Exchange (PSX) – that absorbed three main markets into one – stock shares have witnessed bullish trends on continuous basis. With a market cap of 98 billion USD and listings of more than 560 companies, the PSX provides a rock solid economic image of Pakistan. But the continuous rise and fall of this market creates a number of questions that prove to be a mystery. This unpredictability in Pakistan’s financial market gives the market fraternity two separate angles to deliberate upon: The High and The Low.


The Climb


In 2016, the PSX provided the highest returns on equity investments by any market across Asia. This was a stunning 46% in one fiscal year. It was predicted by market pundits that the index would climb another 8,300 points, and reach a scorching 54,000 points by December.


Till the month of May 2017, the benchmark  of the KSE-100 index hit an intra-day all-time high at 53,124 points, a marginal increase of 11% from the start of the fiscal year. But then the market came tumbling down like a house of cards. In just another 16 trading sessions, soon after the hype the market made a steep decent of 16% to shed 6265 points. However, hopes got another lifeline, as ahead of Pakistan’s reclassification into an MSCI Emerging market from a Frontier Market, the PSX raised back.


Even the PSX management made preparations and announced extra-time sessions to accommodate the heavy increase in activity. But as the trading drew to an end in March, investors were bamboozled to see net outflows of $81.7million. But the question posed was, what went wrong?


Scores of delegations of big brokerages, mutual funds, major listed companies and officials of PSX had trotted the globe, from Wall Street to Hong Kong, before June to gauge the interest of MSCI passive funds in Pakistan.


Every single person was enthusiastic over foreign inflows on the eve of Pakistan regrouping as an Emerging MARKET (EM). However, no one had foreseen that Frontier Market Funds, which retain heavy investment of around $7 billion in the PSX, would go on a selling frenzy.


The buying activity of some companies like ‘Topline Securities’ went up to $452 million while their selling activity was at $534 million. This took the benchmark KSE-100 index on a nose dive to a record single day decline of 1,811 points, or 3.58%.


Overall six companies managed to qualify for the main emerging market index. These included the renowned Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development Company and United Bank Limited.


In anticipation of this outlook of the market mutual funds, banks, companies, stockbrokers and individuals began to build up positions changing the numbers immensely to the cue of the reaction seen in the Dubai and Qatar equity markets, which had received buy orders of $469m and $160m between the MSCI inclusion announcement on June 2013 and the actual inclusion on June 2014



The Decline


It is often said that ‘everything that goes up, must come down’ and that is exactly what these anticipated lot of people and companies alike had to face. These fate guided people who had the six heavyweight stocks in anticipation of selling them to foreign funds at a higher price had carried market prices to unsustainable levels. However, in Pakistan instability is something that is consistent.


At the peak of the market, the following six companies that qualified for the emerging market index had the following values: UBL stock was priced at Rs260, HBL at Rs305, Lucky Cement Rs 962,  OGDC Rs 187, MCB at Rs 247 and Engro Corporation at Rs 399 a share.


Now these six major companies saw a major blow dealt to them by investors who began unwinding their positions due to the lack of interest shown in Emerging Market funds. This saw these six companies now face a steep decent of UBL to Rs 222, HBL to Rs 260, Lucky Cement to Rs 826, OGDC to Rs 141,  MCB to Rs 208 and Engro Corporation to Rs 335. As these six major companies had a heavy margin of almost 70% in the KSE-100 index, they dragged the whole market down with them. From its record all timehigh of 53,124 points in May, the KSE-100 index plunged 6,265 points or 11.79%. Stockbrokers who had accumulated mainly the six big shares but failed to sell-off on time were left stranded at the bottom of the abyss.Whether the present government stays or falls, the fact is that everyone knows that stock markets all over the world hate uncertainties, and so do the economy and the common people.


By: Ahmad Nawaz


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