Volatile year for the stock exchange

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  • Best in the region to worst in the world

The year 2017 was exceedingly volatile for the Pakistan Stock Exchange and its investors with political turmoil in the country clutching the indices. The country has been pummeled by political tensions following the Panama Leaks, disqualification of Nawaz Sharif and implication of Finance Minister Ishaq Dar.

Ante was also upped from the economic front as the current account deficit rose 1.56 times in FY2017, causing foreign exchange reserves to plummet by nearly 20pc. The poor index performance has meant the PSX going from being the region’s best performing market in 2016 to the worst in 2017.

The year 2016 saw the stock market generate a 46pc return with a positive outlook for 2017 as the PSX would be added to the MSCI Emerging Market Index in June 2017. Political and economic tensions prevented the stock exchange from posting a repeat.

An evaluation of the KSE-100 index shows that the market has declined by nearly 16pc since its level of 48,240.28 points on 2nd January, 2017.

The year 2016 saw the stock market generate a 46pc return with a positive outlook for 2017 as the PSX would be added to the MSCI Emerging Market Index in June 2017

Although the Pakistan Stock Exchange has had bears ruling the roost for most of the year and even slid to a low of 38,000 points, it was able to achieve its peak during the year on 24th May, 2017 when it reached a level of 52.876.46 points. It has plunged by almost a quarter of its value since then.

Besides this, it is evident that the Pakistan Stock Exchange has severely underperformed in comparison to peers in the region. The MSCI Frontier Markets reported a gain of 28pc, Emerging Markets posted a gain of 32pc and Emerging Markets Asia indices saw a gain of 38pc during 2017 alone.

Some of the best performing sectors in 2016 have underperformed in 2017.

The cement sector had its market value decline by nearly 50pc due to price wars and supply gluts in the cement industry.

The oil and gas (E&Ps) sector posted a 2pc return in 2017 as opposed to a 52pc return the year earlier. Rising crude oil prices were why some heavyweight E&Ps were able to perform better than the market during the year.

Refineries sector saw its value decline by almost a third (32pc excluding BYCO). This is a prodigious drop from the 65pc return that the sector was able to report the year before.

The major reasons behind the decline in return for the refineries sector is the curtail in their production of furnace oil by the government, leaving companies with surplus inventory on hand that was not being utilised.

The tobacco sector performed well, posting a gain of 33pc on the back of higher taxation slabs being introduced for FY18. The steel sector performed well as it reported a growth of 10pc during the year as well.

The banking sector, considered to be the most valuable sector in the index, declined by 23pc as opposed to reporting a gain of 33pc in 2016. The sector underperformed due to flat financial results, the HBL penalty and NBP pension liabilities issues.

The power sector saw its value decline by 27pc (excluding K-Electric). Overdue receivables and the government’s push to adopt cheaper fuels for power generation were the primary reasons behind the underperformance of this sector.

This downward trend is expected to continue till the upcoming elections take place. Further, developments in the run up to elections will likely throw the cat among the pigeons. The investor confidence can only be restored after the new government is formed.

Foreign flows into the Pakistan Stock Exchange are another important topic of discussion. Since 2009-2014, with the exception of 2011, the stock exchange has reported positive net inflows into the market which accumulate to approximately $1.32 billion. However, 2015 onwards, the market had witnessed net outflows.

This year marks the third consecutive year in which the market is said to report a net outflow of foreign funds. The net outflow is said to be the highest this year, amounting to more that $490 million.

Besides the index performance in 2017, there have been some notable highlights.

In January 2017, the PSX signed a 40pc Sale and Purchase Agreement with a Chinese consortium and a few local financial institutions. The inclusion of the Pakistan Stock Exchange in the MSCI Emerging Market’s category did take place.

Even so, the positive impacts of this inclusion did not materialise due to prevailing political uncertainty in the country.

The year 2017 also saw PSX face some scams and scandals. During the first three months of the year, news of a multi-billion rupee scandal surfaced, where it was suspected that some stockbrokers misappropriated client funds to the tune of Rs7 billion. The Securities and Exchange Commission of Pakistan (SECP) investigated the matter.

What also caught the attention of the SECP during the year was the misleading of Pakistani investors by Mir Mohammad Ali Khan (also known as MAK), who is considered to be an investment guru by many.

The recent move by the State Bank of Pakistan to devalue the currency could impact foreign flow of funds into the Pakistan Stock Exchange in the future. However, it seems as though no matter what happens, negative sentiments – owing to political uncertainty – outweigh all other positive sentiments, leaving investor confidence highly dampened.

What remains to be seen is how the Pakistan Stock Exchange performs up until the elections take place and what is in store for the market’s performance after votes have been cast and the results are announced.