Stocks drop to 27-month low on MSCI EM exclusion risks

Pakistan benchmark KSE-100 index came under heavy selling pressure for the second consecutive week, as the market reached 27-month low level, wiping the index by another 4 percent, and losing Rs361 billion in shape of market capitalisation.

Topline Securities CEO Mohammed Sohail said the market fell 4 percent during the preceding week, taking cumulative two-week losses to 9 percent; “the worst two week performance in three years and six months”.

Investor sentiment was shaken by reports that certain stocks were under risk of exclusion from MSCI’s EM index. This was in addition to already uncertain economic outlook of the country, he said.

Amongst Pakistan stocks in the MSCI EM index, Lucky and Habib Bank fell the most, declining by 11 percent and 8 percent, respectively, and cumulatively eating away 316 points from the index. Resultantly, commercial banks and cements were the worst performing sectors during the week, cumulatively chipping away 595 points from the index, he explained.

Foreigners sold $32.6 million (largest selling after 8 weeks) worth of shares during the week versus net selling of $8.4 million last week. On local front, Companies, insurance and banks were net buyers amounting to $22.8 million, $6.5 million, and $6.3 million, respectively.

The country’s top decision makers finally conveyed their intentions to approach the IMF for a bailout package, with the fund showing its willingness to work on the finer details of a new programme.

This announcement earlier in the week let loose a large nosedive in rupee value against the greenback, which slightly recovered later in the week.

The Financial Action Task Force team conducting review on Pakistan’s progress on compliance with the framework’s guidelines signalled that the country needs to do more work to be fully compliant and gain removal from the grey list in the next review, which hints at increased tightening on scrutiny of financial transactions, hence negative ramifications for the economy.

Amongst individual scrips, KEL managed to garner some interest towards the end of the week, upon renewed expectations of government giving a final go-ahead to Shanghai-Electric for completing the long pending sale of the electricity utility company.

“We expect the market to remain under duress as negative news flow manages to far outweigh any positive developments and market forces continue to factor in the impact of lower rupee, higher inflation and interest rates,” an analyst from Habib Metro-financial Service said. “We recommend spare liquidity in portfolios with a preference for high quality picks once the ongoing volatility is over.”

An analyst from BMA Capital Management said the key data points to watch out for next week include current account deficit and textile exports.

Moreover, results season has kick-started where any positive earnings surprise may attract investors’ interest in select scrips. “Overall, we believe current market levels represent bottom valuation. We prefer defensive, devaluation friendly/hedged, interest rate leveraged and quality stocks,” the analyst said.