Pakistan Stock Market Rocked by Politics

One of the leading brokerage houses of Pakistan, AKD Securities has once again reiterated that country’s equities market is still under pressure due to volatile political situation.

On Monday the benchmark KSE-100 Index lost more than 1,300 points or 5 percent during first half of the day. Nearly 100 stocks (18 percent of total companies listed at Karachi Stock Exchange) hit their lower circuits. The Index has shed about 8 percent from its CYTD high.

The most recent decline is due to further increase in political noise over the weekend, with the PAT announcing its own long march on Independence Day (August 14) and the Army calling a corps commanders' meeting on Monday.

In the absence of a resolution, these developments could continue to drag the market lower in the immediate-term where the market's regional discount (40 percent at present) is likely to expand.

The brokerage house continue to advocate a cautious stance in the immediate-term but flag that Pakistan Equities are beginning to look very attractive from a bottom-up vantage as company level fundamentals remain intact.

Now there is a big question, will political noise rise further? While the market shed 3.1% last week, strong buying was witnessed throughout the week from foreign institutions, with net FPI inflow of US$21.6 million increasing CYTD inflow to US$359.6 million.

In addition, local participation was also witnessed at the tail end of the week with news flow pointing towards a potential breakthrough in the political impasse through talks.

However, the weekend added to the quagmire with PTI remaining firm about long march plan and fresh clashes taking place between the police and PAT activists, leading to the PAT announcing its own long march in the capital on the same day.

Within this backdrop, the Pakistan Army has also called in a corps commanders' meeting to discuss the ongoing Operation Zarb-e-Azb as well as the domestic political situation. While a military takeover still appears unlikely, it cannot be ruled out completely, particularly if street protests turn violent.

The Pakistan market has seen its fair share of political crises over the last 10 years; prominent ones being PPP Chairperson Benazir Bhutto's assassination and resignation of President Musharraf.

In such scenarios the market has at an average shed 5 percent during political crises with the highest fall of 16.3 percent in the week after President Musharraf's resignation and before the imposition of the price floor.

To date the KSE-100 Index has shed 8 percent from its CYTD high. Extending this analysis to the 1990s shows a similar picture (average market decline of 5 percent), with the greatest loss in market cap of over 10 percent following President Musharraf's coup. Based on Monday's intraday low, the KSE-100 Index trades at a forward P/E of 7.9x which is at a 40% discount to the MSCI Asia Pacific (excluding Japan Index).

Although the economic indicators are showing a positive trend but political uncertainty is negatively impacting the market. Analysts recommend investors to follow 'wait and see strategy' policy till stabilization of the political situation. Local equities are now trading at a discount. Although, numbers like these have not been seen for quite some time in recent past. In fact, there are many stocks which have the potential to provide above-average return going forward.