KARACHI: Pakistan Stock Exchange remained one of the worst performing markets in the world as the KSE-100 Index registered a decline of 5.0 percent in PKR terms and 12.0 percent in USD terms in the third quarter of 2021, after delivering consecutive gains during the preceding five quarters.
The average quarterly gains were 10 percent in PKR terms and 12 percent in USD terms.
Almost all the losses during the third quarter were witnessed in the last two weeks, where the KSE-100 dropped 2,371 points (down 5.0 percent) in last 13 trading sessions.
It brings down KSE-100’s recovery from its low on March 25, 2020 to 65 percent and gains in 2021 YTD to 3.0 percent. The KSE-100 is now 15 percent from its peak seen in 2017 in PKR terms, however, market capitalization is down 54 percent in US$ terms (from $99.6 billion to $45.7 billion).
Pakistan was one of the worst performing markets in the third quarter of 2021. Brazil (down 19 percent) and Hong Kong (down 15 percent) were the only other markets that performed poorly than Pakistan. The leading markets were Zambia (up 46 percent) and Mongolia (up 28 percent). These are total returns in USD terms. MSCI EM was also down 9 percent while MSCI FM increased by 2 percent during the third quarter of 2021. MSCI Pakistan recorded a decline of 19 percent.
Concerns at the local bourse stemmed from higher-than-expected Current Account Deficit due to increasing domestic demand and rising international commodity prices, Syed Atif Zafar, Chief Economist and Director Research at Topline Securities said. This also reflected in PKR/USD parity, which deteriorated by 8 percent in the third quarter 2021, he added.
In response, the Central Bank increased the Policy Rate by 0.25 percent to 7.25 percent and also has taken host of other measures to curb domestic demand. The federal government has spoken about increasing tariffs to slowdown the demand growth.
During the quarter, MSCI also decided to downgrade Pakistan from Emerging Market (EM) to Frontier Market (FM).
It is expect market direction to be determined by multitude of factors in the fourth quarter of 2021. According to Syed Atif Zafar, some of the key factors to look out for during the fourth quarter of 2021 are:
Pak -US relationship: The relationship between Pakistan and the US has not been the best since the election of Joe Biden as the President of the USA. It once again came under the radar during the troops pull out by the US from Afghanistan and the subsequent takeover of Afghanistan by the Taliban. The US has been critical of Pakistan’s role in the entire episode, where a bill has recently been moved in the US senate to assess the role of Pakistan in the fall of Kabul to the Taliban.
Pakistan talks with the IMF to resume program:
The staff level talks between Pakistan and the IMF are expected to begin on Oct 4th, while the Finance Minister is also scheduled to attend annual meetings of the World Bank and the IMF from Oct 11-17th in Washington. The resumption of the IMF program has become pivotal due to recent higher-than-expected Current Account Deficit out-turns. For more details, please refer to our report published on August 23, 2021, titled ‘Pakistan and the IMF - Likely scenarios and implications’.
Current Account and PKR movement:
The Central Bank has increased the Policy Rate by 0.25 percent to 7.25 percent along with a host of other measures to control the Current Account Deficit. The government is also expected to take measures, which reportedly aim to reduce the import bill by $800mn/month. The PKR/USD parity has deteriorated by 8 percent in the third quarter of 2021, mostly tracking the Current Account Deficit. The deterioration of both (Current Account and PKR/USD) is likely to keep investors concerned.
Monetary Policy and inflation readings:
It is expected the Central Bank to continue its gradual and measured increase in Policy Rate given the imbalances in the external account and high inflation readings. CPI is also expected to increase beyond 9 percent from November 2021 as base effect phases out. “We expect another 25bps increase in Policy Rate in November 2021 Monetary Policy,” he said.
FATF plenary meeting: FATF plenary meeting is scheduled for October 19-21st. “We expect Pakistan to continue on the grey-list,” he said.
Pakistan’s reclassification to Frontier Markets:
MSCI has decided to downgrade Pakistan from Emerging Market (EM) to Frontier Market (FM). MSCI will do so in one step, coinciding with the November 2021 Semi-Annual Index Review (SAIR).
Copyright Business Recorder, 2021
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