Pre-poll political limbo in Pakistan threatens best stock rally in Asia

A period of pre-election political limbo coinciding with an increasingly perilous economic backdrop is prompting predictions that a rally in Pakistan stocks is set for a reversal.

The benchmark KSE100 Index will probably fall 10-15 percent in the run-up to elections in July or August, said Muhammad Rameez, the head of international sales at Foundation Securities Pvt. in Karachi. That would wipe out this year’s 10.6 per cent gain in local-currency terms, the best performance in Asia.

“A chain of events including politics and economic vulnerabilities, coupled with a lack of earnings growth” will spur drops, said Rameez, who correctly predicted declines in Pakistani stocks before its upgrade to emerging-market status by MSCI Inc. last year. Losses might not be as bad if a planned tax amnesty scheme is approved and implemented in the next few months, he said.

A caretaker government will take over June 1 before the election and will be tasked with managing an economy where the current-account deficit widened by about 50 percent in the nine months through March. Shrinking foreign-exchange reserves are also putting pressure on the rupee, which has already been devalued twice in the last six months.

The lack of a clear frontrunner among the three main parties is also adding to uncertainty among investors. Tehreek-e-Insaf -- the party of ex-cricketer Imran Khan -- now has a better chance of leading a coalition government than Pakistan Muslim League, the party of former Prime Minister Nawaz Sharif who was ousted over corruption charges, Exotix Capital said in a report last week.

“We are facing a significant trade imbalance, pressure on the rupee, and the issue with regards to depleting reserves,” said Farid Ahmed Khan, chief executive officer at HBL Asset Management Ltd. in Karachi. “The market is certainly cautious as to what will happen when the caretaker setup emerges as it will be difficult for them to raise short-term funding and shore up the reserves.”