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KARACHI: Not too long ago, the government sold a 40% stake in the Pakistan Stock Exchange (PSX) to the Chinese at Rs28 per share.
Since then, as of Thursday, the Chinese consortium had seen its investment shed close to 30% of the total value of $86 million.
Additionally, close to $18.5 billion have been wiped off Pakistan’s stock market since the KSE-100 Index – a benchmark for market performance – closed at 52,876.46 – its personal best achieved on May 24 this year. Share prices have plummeted and not a single equity-based fund has posted a positive return in the last nine months.
The index settled below 41,500 on Thursday, an overall retreat of close to 22%, as the stock market’s worst year since 2008 continued.
Volumes have dried up and volatility has risen. Investors are sitting on the bench and awaiting clarity. Some have made the exit while a few are patiently waiting for a positive trigger.
The gloomy situation at the PSX is a far cry from what it was in 2016 when the KSE-100 posted the best return in Asia that was also among the top five in the world.
Now, it has become one of the cheapest emerging markets, but buyers are still missing in action.
What went wrong for the PSX which, at one point, was the government’s strongest pitch to the world?
“Stock markets everywhere abhor uncertainty,” said Maheen Rahman, CEO at Alfalah GHP that manages over Rs28 billion in assets.
The uncertainty arose when Nawaz Sharif was disqualified from the seat of prime minister, a fate that would subsequently result in a reshuffled cabinet, a new premier and reports of infighting within the ruling party. During the time, the Pakistani rupee lost 3.5% against the US dollar for literally 24 hours, and noise over falling foreign exchange reserves, piling debt and widening current account/trade deficits increased further.
As if that wasn’t enough, the country’s finance minister, a staunch believer of keeping the rupee strong, inched closer to an ungraceful exit as well over corruption charges. With him gone, there is no telling when the rupee would fall.
Rahman feels that rupee depreciation is playing on the minds of investors, but some of it has been factored in already.
“At this stage, the stock market has priced in the ex-prime-minister’s departure, at least a 5% depreciation in the rupee and the expectation of greater political noise along with foreign policy shifts leading into 2018.”
While the government has categorically ruled out rupee depreciation, Rahman said some sectors stand to benefit if it does eventually happen.
“Banking sector is likely to be a major beneficiary of the devaluation, as higher inflation could push interest rates higher. Oil and gas exploration, power companies and export-oriented sectors such as textiles and technology companies are also likely to benefit.”
Samiullah Tariq, director research and business development at Arif Habib Limited, echoed the same view.
“It (rupee depreciation) appears to be a potential trigger,” said Tariq. “45-50% of KSE-100 companies provide a hedge against the rupee/dollar parity, whereas the remaining major sectors have enough pricing power to pass on the cost.
“Such an event might also attract foreign flows as it would be an end to the uncertainty regarding rupee parity.”
While local money managers are wary of the looming risk, potential rupee depreciation is also playing on the minds of foreign investors who want to avoid an immediate hit if the dollar gains in value.
“The looming risk of devaluation is restricting an entry point for foreign active managers who want to avoid an immediate 10-15% hit in dollar terms if rupee depreciates in the coming months,” said Shamoon Tariq, partner and portfolio manager at Sweden-based Tundra Fonder.
While the stubborn rupee may be playing on the minds of investors, it is Pakistan’s worrying economic indicators that are at the core of the problem.
A widening trade deficit has forced the government to increase regulatory duty on 356-plus items as it bids to restrict imports while also taking a shot at increasing tax collection.
It may be a quick fix, but many believe that underlying structural changes – including reducing losses of state-owned enterprises, reforming the tax system that includes broadening the base, and creating a conducive environment for businesses – are key to higher economic growth.
Stakeholders say the domestic demand story is resilient, and just some amendments are needed.
“Those of us with clear memories of 2008 understand the benefits of value-investing,” said Rahman. “Pakistan’s domestic demand story is resilient, earnings of companies have continued to grow and valuations are at 2-year lows. Structural adjustments are needed and overall, the political process should be respected and not hampered to restore investor confidence.
Samiullah Tariq also said the PSX is equipped enough to deal with mishaps, ruling out the possibility of a repeat of 2008 when the stock market crashed and was shut down. “The market is more equipped today than ever to deal with mishaps. With the market already reclining from its all-time high of near 53k, chances of an upside are likely to overshadow bearish notions.”
Published in The Express Tribune, October 27th, 2017.