KARACHI (Reuters) – Pakistan’s stocks are set to tumble on Monday as the political turmoil and violence unleashed after the killing of former prime minister Benazir Bhutto threatens to scare off foreign investors and damage the economy.
Bhutto was assassinated on Thursday ahead of elections scheduled for January 8, throwing into doubt a smooth transition to civilian-led democracy after almost a decade of military-backed government under President Pervez Musharraf.
“The likelihood is that foreign portfolio investors would start pulling out. If that happens that would mean a serious amount of selling,” said Nasim Baig, chief executive of Arif Habib Investments which manages $392 million (197 million pounds) in funds.
“This time we may try to conserve cash in case our investors want to cash out.”
Karachi, the biggest city, financial capital and main port, has been paralysed by a spasm of street violence. Shops have been shuttered, petrol stations have closed and railways have been attacked by angry mobs, bringing transport to a standstill.
A promising investment story less than a year ago, Pakistan is now gripped by fears of capital flight if security worsens.
There are also concerns that capital inflows from the Gulf, a substantial source of investment in Pakistani state assets and real estate, may also dry up.
“If the situation prolongs, there will be capital outflows and we will probably see Dubai market doing well because there is money flowing from Pakistan,” said Shoaib Memon, chief executive of Al Falah Securities, which is owned by the Abu Dhai Group, one of the largest foreign investors in Pakistan.
The Karachi stock market has gained 47 percent this year, outperforming major regional markets. The MSCI Asia Pacific index (excluding Japan) is up a third this year.
The gains followed above-average annual economic growth of around 7 percent for the past three years, the sale of state assets and a renewal of confidence in Pakistan following its alliance with Washington in the U.S. war on terror.
Growth is targeted to grow at 7.2 percent in the fiscal year to June 2008, but many economists doubt it can be achieved, given the turbulent political situation even before Bhutto’s death.
Musharraf imposed a state of emergency to ward off unrest surrounding a resurgent judiciary and to fight rising Islamic militancy in the region bordering Afghanistan.
Credit markets also underlined waning sentiment for Pakistan last week when on Friday the country’s five-year credit default swaps — a kind of insurance policy against default — widened by 100 basis points to 480 basis points.
Standard & Poor’s Rating Services also said on Friday that Pakistan’s sovereign credit ratings could be cut if Bhutto’s assassination heightened violence and political turmoil.
Brokers expect the stock market to fall to the limit of five percent of Monday. Under market rules designed to prevent panic selling, daily movement in the index is restricted.
“It is very hard to say whether recovery will come, no one knows anything about the political situation,” said Shuja Rizvi, director of equity broking at Capital One Equities Ltd.
Baig of Arif Habib Investments said he expected the market in the short term to find support at 10 times earnings, against its current value of 11.5 times 2008 earnings, which means a decline of 10 percent from current levels.
The KSE-100 index closed at 14,772.08 points on Thursday, hours before Bhutto was killed in a gun-and-bomb attack after an election-campaign rally. In the previous two trading days, the index had touched life-time closing highs. Financial markets were shut on Friday and Saturday because of the killing.
The Pakistani rupee closed at 61.32/34 on Thursday — a shade below a three-year low — and dealers said it may face further battering.
“The longer the uncertainty persists, the longer the damage and deeper the damage will be,” said Nadeem Naqvi, chief executive of AKD Securities.