The KSE-100 index last week fell for the fourth time in a row; only this time, it tanked by 6.8 percent - its biggest single week decline since October 23, 2009. The cause is obvious.
For the past few months "bubble creation was on the rise", the CEO of one of the countrys top asset management companies confided with BR Research, while referring to the whopping 26 percent increase between October and mid-January.
But having axed more than 1,400 points since then, especially the 818-point decline in just the last week, a relief rally can be expected at the bourse.
"The possibility of a rebound is strong given deeply oversold conditions," says Qasim Anwar, a technical analyst with AKD Securities. But Anwar is quick to point out the immediate downside risks if the market slips below 11,085 points, which if broken can potentially take the market to 10,740 points.
While further correction may indeed be a possibility, the fact that hefty bargain hunting was observed in Fridays fall, hints towards at least some recovery.
Market sources reveal that the state-owned fund NIT was found active in a few energy scrips on Friday that helped the index to recover from its weeks low of 11,100 points and close at 11,223. In between that movement some 45 million shares were traded as against the total KSE-100 turnover of 125 million.
Throughout the last week, the sell counter was dominated by foreign portfolio investors, who disinvested about $5.3 million during the week, with the major selling (of $3.04 million) witnessed on Friday.
Looking ahead, "much depends on foreign inflows, as political issues at home and abroad look grim" says Ahsan Mehanti, CEO of Shehzad Chamdia Securities.
Aside from political woes, however, there might be a few other reasons why foreign investors might shy away from Pakistan.
Emerging market bulls are seen transforming into cyclical bears, on fears that emerging markets will continue to under-perform developed markets in the coming months as the effects of a stronger US dollar and higher US Treasury yields take their toll. This, of course, on top of inflation risks and higher interest rate hikes in the region.
According to the Royal Bank of Canada (RBC) "equity valuations are, in particular, at risk of a correction as prospective future returns are much lower than a couple of years ago. If history is any guide to future performance, EM valuations relative to the G7 were last seen at current levels in 1994-1995, before EM staged a multi-year bear market," FT Tilt - a specialised EM-focussed service - reported earlier this month.
And knowing that Pakistan only gets a trifling spillover of emerging market inflows, foreign portfolio investors may indeed continue to walk away from Pakistan.
But Mehanti pins his hopes on the onset of MTS and the undervalued nature of stocks. "It would be a mistake not to selectively accumulate at current levels," he said, while expressing his liking for energy plays.
Be that as it may, MTS is still unlikely to invite euphoria at the very outset. At one end high borrowing cost is likely to keep leverage investors at bay, and at the other, the fact that KSE investors haven seen a liquidity crisis in the past many months. Nor is the recent fallout a function of the liquidity crunch.
As for the attractive valuations; if foreign investors walk out of the region, as RBC fears, then the burden of supporting the market will fall on local investors.
Keeping in mind that a $5 million weekly FIPI outflow led to a 800-point plus decline last week, perhaps its too much to expect from local investors (sans of course a few big names) - and that too in an environment marked by fiscal blues, Davis dilemma and Pak-US aid relations, rising commodity prices and what not.