Pakistan Stock Exchange (PSX) saw a record decrease of more than 4,000 points during the last week with a negative return of 7.75% for the same week.
The decision to move PSX from frontier markets to emerging markets was well received by a lot of people as it was believed that the decision would attract more investments in the stock market and will serve as a reputational boost for country. The build-up to the inclusion in the emerging market was very strong with heavy inflow of investments taking Pakistani shares to a record high in January, resulting into a cross of 50,000 mark in the market.
But on the day of inclusion in the MSCI Emerging markets, the stock exchange was down by 1,800 points as panic selling continued in the market. The Pakistani market is highly volatile and it was witnessed last week as people started to sell their shares just because other investors are also selling. That is how the dynamics of the Pakistani stock market have been working.
The heavy drop in the market will have a negative impact on the confidence of the investors who had the belief that the market will soar high after entering into emerging market. This happened because the price-to-earnings ratios of Pakistani stocks were undervalued as compared to the shares of other emerging markets.
The market going down was a probably result of a number of factors. Ever since Pakistan exited the frontier market, the funds that owned shares in that index had to be withdrawn. These funds, however, did not buy back straight into emerging market index. Foreign funds was the major factor in selling their stake in the market and was also one of the key reasons for a massive decline.
New budget measures for the upcoming fiscal year also increased the uncertainty amid domestic investors with the inclusion of flat Capital Gain Tax and higher tax rates on dividends. For now, the market has been down but the trend will change once the selling stops and investors regain confidence in the market.
The PSX was the best performing market in Asia last year and its entry in Emerging markets is a huge sign for the country. Thus, the government needs to ensure that it keeps up in its emerging market status and does not let this opportunity slip out.