KSE-100s movement last week has left many observers speechless. Its one of those times when you can decide whether the movement depicts a correction or bearish sentiments; you can even convincingly say if its the time to capitalise at lower levels, continue selling or adopt a wait-and-see strategy.
The one thing that can be said with certainty, however, is that the contrarians are having a ball in one of those I-told-you-so moments.
In a sharp departure from whats called a typical healthy correction that tends to be marked by gradual easing of equity prices, the benchmark KSE fell nearly 4 percent last week - its biggest weekly drop since the week ending August 13, 2010. Fridays fall of 244 points was also the biggest single-day decline since mid-August 2010.
And quite incidentally, August 2010 is also the time when the KSE-100s run-up to its recent high of 12,681 points initially began - in defiance to what the skeptics were then pointing out. But any way, much has changed between then and now.
The ICC World Cup is near, and with that, the typical decline in equity prices as well as in trading volume.
A BR Research story (dated: Jun 11, 2010) earlier noted that "trading volume, during four out of five Cricket and Football World Cups held between 1998-2007, dropped 27 percent over the average turnover of the 30 days before the tournament. The drop is steeper (40 percent) when World Cup period volumes are compared with that in the two months period before the games begin". A similar trend was observed in the case of index values.
Second, "tensions in Egypt have forced foreign investors to pull out their investments from the Emerging and Middle Eastern markets," according to InvestCap Securities, leaving a cascading effect on Pakistani market. Led by the outflow of $1 million on Friday, last weeks foreign portfolio inflows decreased by 97 percent week-on-week to mere $0.16 million - its lowest weekly inflow since last October.
At one end, this shows the susceptibility of the Pakistani market to foreign inflows, and at the other, it also hints towards further decline in the market, as two major developments are seen governing the minds of foreign investors.
One is the risk of rating downgrade by Moodys, as Reuters reported last week. "A key to a (negative) change in the rating is if the fiscal deficit is more than what we expect," Aninda Mitra, Moodys sovereign analyst for Pakistan told the agency. And since most noted economists expect the fiscal deficit to be near 8 percent of the GDP - i.e. 200 bps over Moodys threshold level - a downgrade is on the cards.
The second key factor to watch is the possible consequence of the Raymond Davis issue that includes the withdrawal of economic support from the US and its allies - be it in the form of bilateral or multilateral aid/loan inflows or in the form of Letter-of-Comfort by the IMF.
Both the fiscal deficit and the Davis issue require some shrewd politicking, combined with the restoration of the economy - a difficult task for Pakistani politicians.
With the process of rightsizing the cabinet initiated last week, and with talks of a mini budget, some positive steps on the latter front may be in the offing. But then, its no secret that uncertainty has long found a permanent home in Pakistani politics.
Keeping these trends in mind, the KSE-100 may test 11700~11850 points before it presents a relief rally of 300-400 points.
But if uncertainties on global and local front continue to dominate and offset the positive impact of MPS due this month, then the index would eventually break 11,700 on the downside and the bears would be back in business - until at least 10,700 points. Indeed, the weeks ahead are going to be nail biting moments for the observers of Middle East politics and Pakistans political economy. The sentiments of KSE investors aren going to be any different.