Could Nawaz Sharif’s fate determine the future of Pakistan’s stock market as well?

Published: July 13, 2017

While the stock exchange touched its peak near the date of Pakistan being classified as an emerging market by Modern Index Strategy Indexes (MSCI), its fall is coinciding with unexpected foreign outflows in the market and political turmoil.

The latest discussion engulfing the whole country has been Prime Minister Nawaz Sharif’s joint investigation team (JIT) imbroglio and the stock market’s rapid decline.

In one of my previous blogs, we highlighted how the stock market should be utilised as an investment vehicle. For the record, Karachi Stock Exchange (KSE) 100 Index went up by +50% from that day and stayed the same for the next 24 months.

While sceptics have resurfaced – and so have the bears in the market (which is down +15% from the peak levels) – to criticise the vulnerability of the economy amidst political impasse, it is crucial to holistically view the changing political and economic landscape of the country.

Chronologically speaking, let’s see what has gone against the major political parties of Pakistan.

1. Pakistan Peoples Party (PPP)

The focus seems to be on the second largest political party which has been rife with corruption allegations. Be it matters related to policing powers in regard to the Rangers in Sindh, or the corruption cases against loyalists such as Dr Asim HussainSharjeel MemonNisar Morai and Anwar Majeed, PPP has witnessed a major shakeup.

The presumed de-corruptisation should bode well for the country, hopefully.

2. Muttahida Qaumi Movement-Pakistan (MQM-P)

It hasn’t been long since anti-state allegations were levelled by Zulfiqar Mirza against the largest political party in Karachi. Further agitation by the London-based leaderAltaf Hussain, led to the creation of a political alternative, Pak Sar Zameen Party (PSP), for the Urdu speaking community, led by Mustafa Kamal.

Furthermore, it led to blanket raids and arrests of MQM-P workers allegedly involved in criminal activities. Again, the presumed de-criminalisation should bode well for the country, hopefully.

So why did people believe that the Pakistan Muslim League-Nawaz (PML-N) would be spared?

3. PML-N

The current on-going trial against the PM and his family is now being investigated on charges of corruption, concealment of assets, tax evasion and lying to the court. All this may be a precursor to induce a wake-up call for a political party with an overwhelming majority in Parliament. A word of advice to the PML-N – don’t be arrogant or complacent and avoid assuming a clean sweep in the next elections.

With less than a year to the 2018 general elections, what we are observing is the ‘systematic cleansing of democratic parties’ to improve the very governance of democracy. The recently induced panic within the ruling elite may just be enough to give a popularity dent to PML-N.

It could perhaps be a precursor to a Pakistan Tehreek-e-Insaf (PTI) led coalition government or even a PML-N led coalition government. PPP’s alliance may very well be the swing factor here and so is the possibility of a forward bloc.

A change of face – if the honourable court refers the case to the National Accountability Bureau (NAB) and requests the PM to resign – in the form of a relatively non-controversial PML-N stalwart (did I say Ahsan Iqbal?) might just ensure the continuity of the party.

Back door diplomacy to ensure the survival of the heir apparent could come in handy these days. That may be a much better proposition than playing the victim card and taking on unwarranted confrontation with the military by hinting at a ‘director abroad (another Sharif?)’ and local actors.

Wait, what about the economic risks and all?

Oh, please. The economic well-being of the country has now been deeply inculcated into the matter of ‘national interest’ in light of hostile neighbours and worsening geopolitical ties. Important to highlight here are the two most important politically un-related economic catalysts likely to keep the economy buoyant, even if the government does change:

1. Falling oil prices could not have come at a better time, thanks to the shale boom. If oil would have been at $80-100, we would have seen a much worse current account deficit, higher inflation numbers, higher interest rates and higher fiscal deficit, all because of high costs on domestic government borrowing.

The Darnomics (Ishaq Dar’s economics) scorecard would not have been able to stave off any of these had it not been for the increasing shale oil’s output.

2. The much proclaimed China-Pakistan Economic Corridor (CPEC)and terms of agreements signed between the two countries are inherently binding; they’re not up for discussion, even if there is a change in the government. Thus, we are not hearing any comment from China in support of the ruling party – a role previously undertaken by Saudi Arab or the US.

With the aforementioned economic stimuli, managing economic growth should be a lesser headache for any government in 2018 than it was for Dar in 2013.

While the stock exchange touched its peak near the date of Pakistan being classified as an emerging market by Modern Index Strategy Indexes (MSCI), its fall coincides with unexpected foreign outflows in the market along with political turmoil.

Currently, the shares of the banking sector offer 7-8% dividend yield, enough for retail investors to deploy their savings for the long term. The risks to the stock market are muted from current levels because movements in the share prices are driven largely by improving profitability and strengthening economic growth.

An extremely young population of Pakistan cannot really afford to buy real estate properties with savings of a few thousands per month. But they can very well participate in the overall improving economic sentiments stemming from CPEC and other improving indicators.

With one of the lowest market capitalisation to Gross Domestic Product (GDP) ratio in the region, Pakistan’s stock exchange has a long way to go despite this year’s politically induced correction. There is often a clichéd statement in the market,

“Buy when the blood is on the streets.”

The blood stains are beginning to appear for smart investors as of today.

For the foreigners, and even local investors, the imminent rupee depreciation and the reverse of it the very next day seemed like an embarrassing moment for Dar. He may want to be compared to Germany’s Finance Minister, Wolfgang Schauble, for charting out the game plan for the economic dashboard, but the stubbornness on keeping stable currency did undo his credibility, albeit marginally.

His game plan to borrow US dollar denominated loans is only workable if he manages the currency flattishly, otherwise the rising interest cost would render loans less payable.

As highlighted by Dar himself, 3.2% depreciation of currency causes a Rs230 billion loss to the economy in the form of higher nominal value of USD loans. He would definitely do his best to keep it ‘controlled’ and compensate the affectees through ‘targeted intervention’ and silence the critiques by offering export rebates and slapping import duties.

Howsoever brutal or diplomatic the verdict of the Supreme Court may be, the respondents may be asked to refute the charges and the ensuing legal battle can go on for longer than necessary for an impatient nation like ours. The ‘systematic cleansing of democratic parties’ is the actual ‘Naya Pakistan’ we were hoping for and what we are hopefully going to see now.

Pakistan Zindabad!

Arslaan Asif Soomro

Arslaan Asif Soomro

The author has a degree in Investment Management from Cass Business School, London and has also obtained CFA and FRM qualifications. He is currently working as a Senior Advisor to Swedish based Tundra Fonder AB.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • Israr Khan

    lesser the corruption and more the transparency better rule of law supremacy of justice everything will go in fav of Pakistan if nawaz is disqualified and is punished as well, ppl will start trusting in equal opportunity system of Pakistan, merit and rule of law will attract foreign investors mostly overseas Pakistanis, need to remove nawaz and ishaq daar for sure and punish saeed ahmad, secp chairman and nab chairman, punish them as well, appointing head of departments is not going to change much in fact what will change is when these heads are punished so who so ever is appointed next head would know what is meant by not performing and going wrong… YES disqualification will help Pakistan improve a lot and the stock exchange will pick up NOT go downRecommend

  • Alka Rim

    What goes up, must come down.Recommend

  • Ahmar

    I wholeheartedly agree. Let’s also cleanse PTI of Kaptaan Sahib? He’s been leading the party for the last 20 years after allRecommend

  • Sane

    Pakistan does not mean Nawaz Sharif only.Recommend

  • ab

    Rise above the storm and you will find the sunshineRecommend

  • M.Saeed

    But, this one has thrice gone up and already twice down and once again on way down again.Recommend

  • Abdul moiz

    In the Long run the Stock market doesn’t care whether a bald greedy man or a moral squirmer or some other freakshow is PM ..
    The stock market will continue to rise as all financial indicators are strong … the earnings are high , the revenues have doubled, the production processes have become cheaper and more efficient the technologies have developed, and the stock rates that i predicted are all spot on

  • Hassan Mirza

    Pakistan fate is corruption and 99 % pakistan nation is corrupt so nothing will happened .The difference between 3rd world country and developing countries are 3rd world countries people only talk and no body want todo any thing practically where as developing country do things and move on to next step .panama leaks issues world wide finished but still going on in Pakistan as they not have nothing else to do no body ask any body where is all that money is who corrupt people of Pakistan have do pakistan is benefiting with that money ?Recommend

  • Hassan Mirza

    Once junior Bush said Pakistanis can do any thing for Money .including Selling there mother. Country is Like Mother today this statement is look so true A country prime minister is in Supreme Court for billions of dollars corruption charges including his whole family over a one and half year without any shame and whole resident of Pakistan in with it without any shame like there is nothing else it self is corruption justice delay justice deny so any one in the rest of the world know very well what will happened nothing will happened Nawaz sheriff and his family will I’ve in power as Allah says jisay tum hoo waisay tum per hukmaran musalat kiya jian gaaRecommend

  • sterry

    Who cares about what Bush or anyone else there says? Bush would sell himself or America for money too – same for Trump. Thet are businessmen. Maybe you need to think about what is best for Pakistan. Look at Pakistan’s economy which is the best in the Muslim world with one of the highest growth rates in Asia. JIT is not about corruption or a few flats bought in London 20 years ago when everyone used off shore accounts all over the world legally. This about taking over power from Nawaz Sharif since Imran Khan cannot win in the polls and he can’t wait until 2018. It’s a shameless power grab because uneducated people can’t understand that democracy means waiting for elections and convincing workers. The shameless way to take power is by 3 rd world dharnas and circus court cases to prevent an elected government from giving the country more progress like it has currently been doing. Let Pakistani democracy prevail and let elections take place in 2018. The public will decide who is right.Recommend

  • Hassan Mirza

    Conspiracy Theories and leaving in denial will not do any country good .Any country growth judge by its Tax collection where in Pakistan running on loans .And no body from prime minister to an sweeper is not want to honest tax coming on social media for free and talk patriotic is one thing and showing is different ball game billions of Dollars corruption involved nor single penny recover but we discussing or drum beating day night weather there was this or that lol The Pakistan Mind set is free things mentality or doing business on other people expense if this same situation were in USA or UK I know for sure they seized every thing of Nawaz sheriff till prove innocent. in Pakistan every thing is other way lol is that call accountability ?or jokeRecommend