Panama verdict: The 10 minutes when many made millions

After judgment day, what now for Asia’s best-performing market in 2016

KARACHI: In 10 minutes, between 2:10pm and 2:20pm on Thursday, the KSE-100 Index jumped over 1,200 points for one of the fastest increases ever posted by the Pakistan Stock Exchange (PSX) and the quickest bucks anyone has ever made.

The trading floor cheered and investors were finally relieved.

April 20, 2017 will go down as a historic day in Pakistan’s politics. The fate of a serving prime minister of a major political party, which came into power on the back of an overwhelming majority in the 2013 elections, was left to five judges of the country’s highest court.

In its judgment, the Supreme Court bench ordered the formation of a joint investigation team that would feature representatives from the country’s military agencies, regulatory authorities of the banking and corporate sectors as well as the accountability bureau. The judgment added that the team will continue probing the allegations of financial irregularities and money laundering, while noting that at present, there is “insufficient evidence to remove Prime Minister Nawaz Sharif.”



That is all investors at the stock market wanted - some sort of certainty and an end to the Panama case hearing, 57 days after the case was last heard by the court during which the benchmark shed over 6.2% and touched a low of 46,000.

On judgment day, the KSE-100 reacted in the most emphatic fashion, too.

“The Panama verdict uncertainty phase is now behind us,” Arif Habib Limited CEO Shahid Habib told The Express Tribune in an emailed response. “However, we can expect the verdict to factor in, in the next one or two sessions, and then the market will likely trade on company fundamentals and outlook, MSCI-Emerging Market event, budget expectations and local and foreign liquidity.”

The KSE-100 Index dipped as the euphoria over the prime minister keeping his seat - by a whisker - died, but it still ended 2.39% or 1,140 points higher.

“There was a reasonable consensus among market participants on the formation of joint investigation committee and should be taken positively,” said Shamoon Tariq, partner and portfolio manager at Sweden-based Tundra Fonder. “PML-N policies would continue to excite investors in the short term amid upcoming elections. However, in the medium term the market performance remains contingent on the conclusions of the JIT. All in all, it is good for the overall country as this judgment would serve as a framework for future corruption cases.”

[infogram url="//infogr.am/kse_graph_panama" height=“600" width="945"]

Bears have dominated in 2017

This year, stock prices have plummeted and are nowhere near the levels they were once at. Fund managers remained cautious and portfolios took a hammering.

The KSE-100, which posted a return of over 45% in 2016 and earned the title of Asia’s top-performing market, began to lose steam. It finished at a record high on January 26, but it was all downhill from there. News of broker defaults, regulatory crackdown against illegal in-house financing and political uncertainty took their toll.

Negative ride subsiding

But tensions have begun to subside. New regulations over in-house financing, where banks have been asked to step in to offer funds, are seen as a positive. The Chinese consortium has also officially taken over management control of the PSX and brokerage houses have also made money from the stake sale.

“We have seen negative impacts of informal margin financing and resultant volatility during winding and unwinding of in-house financing in 2005 and 2008 crisis. As the new regulations are poised towards documentation of margin lending, it should certainly provide easy access to the capital and curb manipulation of the market,” said Tariq.

Habib, who runs affairs at one of the biggest brokerage houses in the country, said China’s control of the stock market will “facilitate the development of new products (options, derivatives and other products), aid technological, cross-border listing, and increase activity by foreign investors”. Loosely translated, stocks are set to go north.



But that is not the only reason why share prices are bracing for a rise.

Pakistan is set to enter MSCI’s Emerging Markets Index after a gap of nine years. The country was removed after the 2008 crash that resulted in trading being suspended to halt equity sell-off amid financial turmoil.

While foreigners have remained net sellers, stakeholders believe inflows will start in May.

“May 31 is MSCI-Emerging Market event day and we see a lot of activity coming in the month of May - from both active and passive funds.”

Tariq, however, feels that while an assertive timeline for active funds to allocate funds may vary, flows are certainly on their way during the “next 1-year”.

According to Tariq and Habib, sectors that are likely to remain under the limelight are expected to be cement, steel, banks and consumer products.



Position of the economy

In a broader manner, the stock market and share prices take their cue from the economy. Pakistan posted its highest GDP growth of 4.7% in eight years in fiscal 2016, according to statistics of the Ministry of Finance, and return to political stability has helped investors show more confidence.

But a widening current account deficit and falling exports have some followers worried.

“We have an import cover of about 4.4 times,” said Habib, referring to Pakistan’s foreign exchange reserves that currently stand at $21.6 billion. “It gives us comfort in terms of balance of payments which has significantly improved over the years and we expect it to remain constant at this level. The government will timely restructure their long term foreign debts.”

Tariq, on the other hand, was slightly more wary.

“Falling exports is something the government should focus on. As IMF loan repayments begin, Pakistan might see serious deterioration of reserves and can lead to a balance of payments crisis. Unless the government is unable to bridge the gap through increasing exports or FDI, we might be heading towards a new IMF loan programme.”

Published in The Express Tribune, April 21^st, 2017.

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