Hang on a minute! Why is it so the benchmark index Pakistan Stock Exchange (PSX) has lost 10 percent in the fiscal year to date, when in fact it’s much touted driver – the hype-creating foreign portfolio investments – aren’t as bad this year as it were in the last two years.
The answer lies in political uncertainty that has wrapped the country since the Supreme Court announced its ruling on the Panama Leaks, booting out former PM from the political arena and leaving a thick cloud of doubts over Pakistan’s political future as the country gears up for upcoming General Elections.
But according to brokerage, Arif Habib Limited, that bad patch for KSE-100 is about to end. In a recent, the brokerage said, “we believe the market will perform better in the upcoming caretaker setup, which is expected to take charge from 1st June 2018, as has been witnessed during previous regimes.”
The report showcased KSE-100’s performance in the last five caretaker setups where, according to AHL’s calculations, the KSE-100 “delivered a positive return of 14 percent on average during prior caretaker setups”.
“Hence, taking a cue from said trend and given political noise and/or economic conditions remain manageable, the KSE-100 could potentially provide a decent positive return during the new caretaker setup”, expected to take by the end of this week.
AHL doesn’t provide a reason for this trend. Perhaps, one reason could be that investors read the onset of caretaker set up as an early sign that well elections are going to take place. Which is perhaps why most of the gains in caretaker set ups have happened in the latter half of their regimes?
Would this be the same, or different? That question can be answered with 100 percent surety only in retrospect for only the hindsight is 20-20. But here is some food for thought.
Each of the last five elections came with their due share of political uncertainty varying according to the circumstances that prevailed then. But for at least the last three elections – 2013, 2008, and 1997 – there was a sense of clarity of who is going to win the elections.
Both in 2013 and in 1997, PML-N was the expected winner, according to consensus estimates of political seers. Surely, there was no surety, but by and large people expected ‘N’ to win. Likewise, in 2008 the PPP was expected to win especially after the assassination of Benazir Bhutto.
This time such clarity does not exist. In fact, given the kind of reactions by Nawaz Sharif, even the future of PML-N has come under risk – at least for this election. This creates a guessing game for all and sundry in terms of who or what political consortium will rule the centre. Theoretically, the markets don’t like uncertainty, and therefore they shouldn’t like this one either.
Not that the PSX has ever tracked economic surveys (such as inflation expectations or business confidence surveys etc) but this lack of clarity is worrying foreign direct investors currently present in Pakistan.
The latest wave of OICCI’s survey said: “there is an element of uncertainty in the environment due to upcoming elections which together with return of energy crisis during the recent months has led many respondents to show concern in the next six months in terms of the expected profit and return on investment”, whereas majority of respondents believe there will be a negative impact on CPEC (51%) and growth of business opportunities (64%) post-elections.
In the meanwhile, let’s not forget the gradual strengthening of the greenback, because of which investors have been pulling money out of emerging markets. As of a result of that, developing country currencies have been taking a hit, whereas the MSCI Emerging Index that tracks developing country equities has lost nearly 11 percent since late January. Which is why of the $197 million FIPI outflow in Pakistan FY to-date; $127 million happened since January-end 2018.
If dollar strengthening is a temporary phenomenon, then this pressure should ease. But if it is not, and the pressure worsens, then the PSX equities might need some caretaking!
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