Stocks end flat as economic woes weigh heavy

Stocks cut a flat figure as rising external account concerns and depleting foreign exchange reserves capped gains during the week ended March 16, 2018, dealers said.

An analyst in a Topline Securities report said investors clung to caution as chances were increasing for further devaluation of rupee to restrict yawning current account deficit. “As a result, investors have started hedging their portfolios by investing in dollar index sectors like exploration and production, which remained top contributors to the gains made during the outgoing week,” the report said.

The KSE-100 shares index strengthened 0.81 percent or 351.94 points to close the week at 43,363.21 points, while the KSE-30 shares index shed 0.27 percent or 60.32 points to end at 21,550.69 points.

Although average daily volumes improved by 15 percent to reach 175 million shares a day, the bulk of the activity remained concentrated in small- and mid-cap sectors. Faizan Ahmed at JS Global Capital said volatility can be attributed to investors’ confusion over supercharged political scene, following Senate elections, where the ruling Pakistan Muslim League-Nawaz (PML-N) managed to secure majority, but opposition backed Sadiq Sanjrani and Saleem Mandviwalla managed to get away with the chairman and deputy chairman positions respectively.

“News flow on the macroeconomic front also remained unsettling as IMF’s (International Monetary Fund) staff report talked about disappointing progress of Pakistan's structural reform program and rising borrowing needs amidst dwindling foreign exchange reserves,” Ahmed added.

The IMF has cast concerns over widening growing external/fiscal imbalances, decline in foreign exchange reserves and debt sustainability risk. Besides its expectation of growing gross external financing over the years, it also slashed its GDP growth forecast for fiscal year 2018/19 to 4.7-5.0 percent from 5.9-6.0 percent.

Moreover, the IMF recommended continuation of exchange rate flexibility and further monetary policy tightening to address the issues.

As a result, despite closing in the green zone, volatility persisted in the key large-cap sectors like exploration and production, which gained 1.0 percent, commercial banks 0.2 percent, oil marketing 1.7 percent, and fertilisers lost 0.5 percent.

During the outgoing week, foreign investors remained on the sidelines with a net selling of $10.4 million, which was mostly absorbed by local mutual funds with a net buying of $6.3 million amidst improving liquidity. FTSE’s semi-annual rebalancing, which came into effect as of Friday’s close, resulted in the removal of Thal Limited and Pakistan Telecommunication Limited from its Global Equity Series (Small Cap) Index.

On the macroeconomic front, country’s total foreign exchange reserves declined to $18.2 billion owing to external debt repayments. Further, the incumbent government is planning to launch an amnesty scheme to support worsening fiscal deficit position in the country.

On the other hand, US passed a bill to renew the GSP status for Pakistan, which would allow duty free access of goods to the American markets.

Since the result season is almost over, analysts expect political and economic situation to take the driving seat, setting the market direction down the road. With the deteriorating position of foreign exchange reserves and domestic debt, market is likely to remain lackluster performance until the general elections.