Daily Times

The KSE-100 index breached through the psychological barrier of 40,000 points last Friday. The fall from the all-time high of 53,127 points in just over six months is bombastic in magnitude. What makes this development confusing is that Pakistan Stock Exchange (PSX) was christened Asia’s best performing stock market in 2016 with 46 per cent of annual return. With the successful purchase of 40 per cent stakes in the PSX by a Chinese consortium and the Emerging Market (EM) Status, everybody thought that the stock market would set even more records in 2017. On the contrary, the year 2017 will be known for all the wrong reasons for PSX.  So what happened to Asia’s best performing stock market?

Pakistanis always look to politics for explaining developments on the economic front. Since the ouster of Nawaz Shairf, a very gloomy picture of the economy is being presented by the mainstream media and leaders of major political parties. In their daily market analysis, even equity analysts are highlighting adverse political developments as one reason behind the great plunge of PSX. Pakistan’s relationship with the United States has also deteriorated over the last six months. All of these unfavourable developments have taken a toll on Pakistani equities. Stock market is the game of sentiments and nothing can determine sentiments better than political happenings. Asian stocks take a dip whenever North Korea conducts a nuclear test or Donald Trump tweets about a potential war with renegade nuclear state.

However, politics is good enough to explain only a temporary dip in stock markets. PSX is known for recovering swiftly after political crisis. The KSE-100 index rebounded the day Supreme Court disqualified Nawaz Sharif. But again, the rally proved short-lived as bears dominated even after a new prime minister and his cabinet was sworn-in. There has to be more issues at play than just political crisis. Let’s turn our attention to some of the non-political factors.

Pakistan’s external sector woes are also believed to be denting investor confidence. State Bank’s official foreign exchange reserves have decreased at a fast pace due to a rising import bill while exports have lagged behind during this period

Pakistan’s external sector woes are also believed to be denting investor confidence. State Bank’s official foreign exchange reserves have decreased at a fast pace due to a rising import bill while exports have lagged behind during this period. There have been warnings of imminent rupee depreciation or another IMF bailout just like in 2008 and 2013 when PML-N government came into power.  But even when the KSE-100 index was increasing earlier this year, Pakistan’s external sector was already in stress. Our dollar reserves have been decreasing since late 2016. Similarly, our current account deficit is worsening since 2013.

Here again, I don’t believe that the poor situation of Pakistan’s external sector is to be blamed. The PSX is still healthy because price-to-earnings ratio is hovering around 7.7 which mean that corporate earnings have improved. Last week when the PSX remained under selling pressure for five successive sessions, foreign investors poured in $38.8 million which is highest compared to any week since 2013. This trend is not limited to last week. Foreign investors have been net buyers for the last three months due to attractive valuations of equities and repeated announcement by the government not to depreciate rupee. Such moves by foreign investors prove that Pakistan’s ongoing political and external sector crisis is not dampening investor confidence that much.

These two factors alone can’t wipe off almost half of the market capitalisation. In the past, we had believed that our stock market is highly manipulated by some big brokers. Almost half of the daily trading is conducted by a handful of brokers which naturally gives them manipulative powers. But no player in PSX is bigger than the government itself. Almost one-third of the market capitalisation belongs to 8 public sector companies listed at PSX. Government should be blamed for stock market vagaries as much as any other influential broker.

The recent bubble of PSX was fuelled by government. In April 2012, the government announced a tax amnesty scheme for the stock market. Under the amnesty scheme, section 111 of the Tax Ordinance was suspended till June 2014 that allows tax authorities to tax income, assets, and investment of a person whose nature and source are unexplained. Since April 2012, KSE-100 index posted average monthly returns of 4.2 percent till May 2017 when the government-created bubble went bust.

Ironically, government itself interrupted the up-surge in stock market. Under Federal Budget 2017-18, it increased the withholding tax rate to 0.02 percent, Capital Gains Tax (CGT) to 15 per cent for filers and 20 percent for non-filers regardless of the holding period, and income tax on dividends to 15 percent.

Government itself has sold its holding worth around Rs 200 billion since the index peak. Imagine what will you do if the biggest player in the market goes on a selling spree? As this piece goes to the print, the KSE-100 index has already recorded a brief recovery on the expectation of a government bailout package. Government is again at the forefront of stock market fortunes or misfortunes.

The writer is a researcher and works in the development sector of Gilgit

Published in Daily Times, October 19^th 2017.