Pakistan''s stocks are set to tumble on Monday as the political turmoil and violence unleashed after the killing of Benazir Bhutto threatens to scare off foreign investors and damage the economy.
"The likelihood is that foreign portfolio investors would start pulling out. If that happens that would mean a serious amount of selling," said Nasim Baig, chief executive of Arif Habib Investments, which manages $392 million in funds.
"This time, we may try to conserve cash in case our investors want to cash out."
A promising investment story less than a year ago, Pakistan is now gripped by fears of capital flight if security worsens. There are also concerns that capital inflows from Persian Gulf countries, a substantial source of investment in Pakistani state assets and real estate, may also dry up.
"If the situation prolongs, there will be capital outflows and we will probably see Dubai market doing well because there is money flowing from Pakistan," said Shoaib Memon, chief executive of Al Falah Securities, which is owned by the Abu Dhabi Group, one of the largest foreign investors in Pakistan.
''FUNDS'' WARY The Karachi stock market has been up 47 percent this year, outperforming major regional markets. The MSCI Asia Pacific index (excluding Japan) is up a third this year.
The gains followed above average annual economic growth of around 7 percent for the past three years, the sale of state assets and a renewal of confidence in Pakistan following its alliance with Washington in the US war on terror. Growth is targeted to grow at 7.2 percent in the fiscal year to June 2008, but many economists doubt its achievement, given the turbulent political situation even before Benazir''s death.
Credit markets also underlined waning sentiment for Pakistan last week when on Friday the country''s five-year credit default swaps--a kind of insurance policy against default--widened by 100 basis points (bps) to 480 basis points.
Standard & Poor''s Rating Services also said on Friday that Pakistan''s sovereign credit ratings could be cut if Benazir''s assassination heightened violence and political turmoil.
Brokers expect the stock market to fall to the limit of five percent on Monday. Under market rules, designed to prevent panic selling, daily movement in the index is restricted.
"It is very hard to say whether recovery will come. No one knows anything about the political situation," said Shuja Rizvi, director of equity brokering at Capital One Equities Ltd.
Nasim Baig said he expected the market in the short term to find support at 10 times earnings, against its current value of 11.5 times 2008 earnings, which means a decline of 10 percent from current levels. The KSE-100 index closed at 14,772.08 points on Thursday, hours before Benazir was killed. In the previous two trading days, the index had touched lifetime closing highs.
The rupee closed at 61.32/34 for a dollar on Thursday and dealers said it may face further battering. "The longer the uncertainty persists, the longer the damage and deeper the damage will be," said Nadeem Naqvi, chief executive of AKD Securities.