On 14 February 2019, a convoy of vehicles carrying security personnel was attacked by a vehicle-borne suicide bomber in the Pulwama district, about 20 km from Srinagar, capital of Indian Occupied Kashmir (IOK). The attack resulted in the deaths of 40 Central Reserve Police Force (CRPF) personnel with at least 70 left injured. The responsibility for the attack was claimed by a militant group Jaish-e-Mohammed.
Ever since attacks on Pulwama took place, Pakistan and India have left no stone unturned at taking a jibe at each other. While there is no doubt that the regional peace of both the countries was compromised, the ongoing tensions also took a toll on the capital markets of both the neighboring countries as well as Asian markets.
Pakistan’s KSE-100 index and KSE All share index remained completely dependent on the India-Pakistan fiasco. When the tensions between the two countries were at peak, the benchmark index responded by losing up to 1500 points.
Moreover, benchmark index’s reaction to Indo-Pak tensions also went on to show the vulnerability of capital markets towards negative information. This notion can be supported by the fact that the benchmark index depicted almost no reaction towards the announcement by Saudi Crown Prince to invest billions of dollars in Pakistan.
Coming back to the equity market, there is no doubt that investors indulged in fearful selling throughout the ‘War’ drama, which led to the index going down by 4.7%. However, after PM Imran Khan addressed the nation emphasizing Pakistan’s desire for peace and will to resolve the issue through dialogue, the index quickly responded by recovering around 1,362 points.
The questions however remains whether the confidence of the investors is fully recovered or not. At a time when Pakistan economy is showing some signs of stabilization and is planning to seek IMF funding, this political risk has indeed affected investors’ confidence.
Regardless of shrinking current account deficit, monetary tightening and import duties, the Foreign Exchange (FX) reserves are still hovering around $14 billion. This is despite $4 billion (out of $6 billion) financial support received from Saudi Arabia and UAE.
But majority of the analysts believe that the ongoing brawl between Pakistan and India has somewhat fizzled out following various ‘peace gestures’ exhibited by Pakistan’s Prime Minister. Even so, if the two countries do not back off from the unnecessary scuffle, various international community especially USA, Saudi Arabia and China may definitely intervene as these countries hold strategic interests in Pakistan.
Keeping in view this assumption, a report by Topline securities suggests that the index is expected to hover between 40,000 to 45,000 points. Moreover, IMF loan expected in June 2019 should also help bring financial discipline and restore investors’ confidence.
In worse case, if this tension intensifies and is extended to months, the capital markets may suffer extreme losses given its dependency on regional and political peace. This idea is also supported Topline Securities, as it maintains that the index may go as low as 30,000 amid rising political risk coupled with Pakistan external and fiscal issues.
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