PSX emerges as worst performing investment avenue

KARACHI: Stocks market emerged as the worst performing investment avenue among all its peers during 2018 as economic and political challenges caused equities to turn up negative returns of five percent during the period, analysts said.

Topline Research said the market continued to post negative returns for the second consecutive year, “posting five percent decline in rupee terms in 2018 versus 15 percent last year, while the decline in dollar terms was 25 percent versus 20 percent”.

“Weak macroeconomic indicators, such as higher current account deficit and lower dollar reserves shattered investors’ confidence while foreign selling of more than $500 million (highest since 2012) further exacerbated the market’s performance,” the research arm of Topline Securities said in an yearend review report.

The stock market has been facing troubles since after its peak attained in May 2017 when index hit all-time high of 52,647 points. The political noise was created from ouster of former Prime Minister Nawaz Sharif.

The index shed 8.4 percent or 3,405 points to close at 37,066 points in 2018. Stock market closed on negative note for second consecutive year. Erosion in share values amounted to nearly one trillion rupees.

Morgan Stanley Capital International (MSCI) Emerging Market Currency Index gained 21.8 percent in rupee terms in 2018. The index, however, declined 4.2 percent in dollars terms. Weights of each currency in MSCI’s EM Currency Index are equal to the relevant country weight in the MSCI EM Index. Pakistan’s weight is estimated at around 0.04 percent in MSCI EM Index.

Topline Research said challenging economic environment and need to devalue rupee against dollar as per real effective exchange rate (REER) index led to 21 percent rupee depreciation. REER index stood at 115.12 in January as against 124.2 in November 2017.

The brokerage further said one-year dollar term deposit receipt provided 26.8 percent return in rupee terms, followed by 23 percent return on investment in gold.

Real estate transactions remained dull during the outgoing year, as political and legal headwinds kept investors at bay. Activities, however, picked up near general elections in June-August.

The State Bank of Pakistan raised policy rate by 425 basis points to 10 percent in 2018 as macroeconomic variables worsened and inflation inched up.

While return on one-year fixed income instruments, such as treasury bills and national saving scheme, remained flat at six percent, six-month tenure bill generated a slightly better return of 6.5 percent due to higher rates in later part of the year.

International oil prices are falling due to weakening of global demand and oversupply concerns. During the outgoing year, Arab light crude fell 17 percent, while west Texas instrument declined 29 percent. Arab light crude generated five percent return in rupee terms on devaluation.

The market during April touched the year high of 46,636 points on expectation of support from budgetary measures. The budget announcement from the outgoing government was not an encouraging one rather according to a leading analyst it substantially hit the daily volumes.

The government increased the tax on buying and selling of shares from 0.1 percent to 0.2 percent, which curtailed the daily turnover.

Average volumes dropped to five year-low to settle at 190 million shares, down 20 percent year-on-year compared to CY17 average volumes of 237 million shares.

Likewise, average value traded plunged 42 percent year-on-year to $67 million – the level that was last observed in CY13 – compared to $115 million in CY17.

Samiullah Tariq, director of Research at Arif Habib Limited said the decline in average traded value and volumes was a result of lack of investors’ confidence amid political uncertainty, rupee devaluation resulting in foreign selling, and economic challenges for new political setup after April elections.

Tariq said volumes registered a high of 461 million shares on 29 October – highest since inclusion in MSCI Emerging Market Index on 24 May 2017 of 607 million shares. The market witnessed its lowest volumes at 57 million shares on 17 May.

Despite continuous corporate earnings growth, KSE 100-share Index has not been able to maintain its growth trajectory due to political uncertainty, volatility in business dynamics and slowdown in economic growth.

Investors were confident of the smooth political transition, but things turned around due to worsening macroeconomic conditions on account of persistent fiscal and current account deficits and bleeding of foreign exchange reserves.

Rupee depreciation also made heavy dents in the price run-up at the stock market. Foreign investors remained on their toes and during the whole year they were net sellers of $534 million worth of shares and were net sellers during 34 continued weeks out of 52 weeks.

Major foreign selling was witnessed in banks amounting to $259 million given decline in profitability of large banks due to pension cost, higher admin costs and higher provisioning.

Exploration and production sector witnessed selling of $139 million primarily due to rupee devaluation while cements sector registered an outflow of $72 million amid surge in international coal prices and inability to increase cement prices, and power generation and distribution and textile recorded selling of $34 million and $26 million, respectively.