What next for Pakistan’s stocks?

The benchmark Pakistan Stock Exchange has swerved sharply north from its multi-month low it hit in December 2017. It posted such sharp gains in January 2017, that boys in the market still can’t wipe off the smile their faces.
KSE100’s fall from grace to 37,919 points was much expected. This column had been cautioning a slide to 39,000 (or even possibly 36000) since the then PM Nawaz was first told to appear before the JIT formed by the Supreme Court. But the bouncing back of stocks December 20th onward did come as a surprise. After all, back in the third week of December, the big ‘dharna’ and ensuing politics risks were still on the cards. The market should have reacted to uncertainty, for uncertainty is pernicious for the markets. It didn’t.

Then again PKR’s depreciation happened – the risks of which had kept foreign investors at bay for months amongst a host of other risks. That - and fresh liquidity injection in emerging markets in general after the new year provided a breather to local players.

Recall that foreigners have been selling throughout last year, with local mutual funds leading the buying spree until late May 2017. Then ‘oops’ happened. The market realised it had misread both politics and the so-called inclusion in MSCI-EM index. Between late May 2017 and late December, foreigners sold profusely and so did local mutual funds, whereas local banks and insurance firms took advantage of low prices. Throughout this period, ‘individuals’ counter was quiet; they didn’t do major buying or selling save for the selling leading up to the formation of the JIT in late April 2017.

Now strangely, the only local major buyers are individuals. Considering that most moneyed investors from banking and insurance industry are selling since late December, are local individuals and the foreign investors being taken in for a ride? Will they be burning their fingers soon?

Let’s face it. The market is at one of those turns on the highway that are too tempting to not race ahead and yet they could be treacherous. If investors act too fast, they might slip and fall into a valley. If they are too slow, someone else might take a lead. In this business, the loss of opportunity hurts as much as the actual loss. On the economic front, concerns over external account have been allayed for now. The balance-of-payment seems to be a concern for at least 6-9 months, which is the kind of horizon punters usually look at. The political risks have also subdued after the PTI-PAT-PPP dharna in mid-January turned out a damp squib.

These are good news. And as such nothing should stop the market from swerving further north. But there are signs on the road that read ‘SLOW’. First, in politics, it isn’t over till the fat lady sings. Even if the PML-N may be seen as the front runner for 2018 elections, it is too early to place all your bets on it. Second, the yields on 10-year PIB have been on the rise. Anyone following these columns should know how the rise of yields spells bane for the stocks.

Third, the 10-year US Treasury bond yield hit the highest level in nearly four years, causing stocks to sell off sharply. And if, in light of improved US economic indicators, the Fed chooses to lift rates even modestly, stocks in regional and emerging markets could start sneezing. Is this why banks, insurance and companies have been selling and the only local segment buying is the one comprising of individuals? Perhaps! But what turn should the market take? Prudence suggests taking it slow until the road presents more clarity. But knowing that the loss of opportunity hurts as much as the actual loss, don’t be surprised if by May 2018, investors keep pushing the benchmark index towards May 2017 highs.