As the Pakistan election date nears, the Pakistan Stock Exchange shows its worst June performance in nearly two decades.

A report about stock index manipulation suggests that the elections in Pakistan may have a negative impact on stock returns. Nearly a year after Pakistan was proclaimed the top-performing market in Asia with a staggering 46% return, political events in the country have cast a shadow over the landmark Pakistan Stock Exchange success.

OpenClipart-Vectors / Pixabay

About a year ahead of the Pakistan election date, which is in the summer of 2018, the Pakistan Stock Exchange continues to struggle due to political events, with the KSE-100 Index finishing below the45,000-point level on Thursday.

In May, the KSE-100 index skyrocketed 400 points to reach the 52,700 level at the open amid the news that Morgan Stanley Capital International (MSCI) upgraded the Pakistan Stock Exchange (PSX) to Emerging Market status for the first time in over nine years. While the upgrade opened the door for global investors that track the index with $1.4 trillion to $1.7 trillion in hand, the stock index is now falling steadily, and experts say political events are to blame.

Why does the Pakistan Stock Exchange “hate” the Pakistan election date?

It’s a little more than a year before the Pakistan election date in 2018, so the Pakistan Stock Exchange may have begun reacting to political uncertainty early. It’s not just the uncertainty over the upcoming election in 2018 but also the ongoing Panama case investigating Pakistani Prime Minister Nawaz Sharif’s alleged ties to corruption.

The Pakistan Stock Exchange is also believed to be underperforming due to external account deterioration and as a consequence of the government’s federal budget for fiscal year 2018. In the new budget, the government ignored key proposals from the Pakistan Stock Exchange and instead enforced stricter tax measures on investors and companies.

However, the impending Pakistan election date may be the main culprit behind the Pakistan Stock Exchange’s weakening performance. A new study into stock index manipulation states that it’s not an unprecedented behavior of the stock exchange, as the “decline of points in KSE-100 index due to any political change is a normal behavior for stock exchange market in Pakistan.”

The International Journal of Accounting and Economics Studies published a study into stock index manipulation on Wednesday, offering evidence that political events and the Pakistan Stock Exchange’s performance are tightly connected.

Pakistan is an ‘unreliable place for investment’: study

The study reviewed three elections in Pakistan – 2002, 2008 and 2013 – and concluded that political events can have either a significant negative or positive impact on stock returns. In the case of the 2002 and 2008 elections, the Pakistan Stock Exchange was bleeding from uncertainty even in the pre-election period.

In 2013, however, the victory of Nawaz and the investor-friendly government that was formed spurred the growth of the KSE-100 Index. Fast-forward to the present day, and the latest stock index manipulation appears to be that investors have their doubts about the upcoming Pakistan election date in 2018. Due to the heightened sensitivity of the Pakistan Stock Exchange to political events, the study concludes that the country “is likely to be considered as unreliable place for investment.”

However, Pakistan is far from being the only country whose stock exchange is deeply influenced by political elections. The study’s authors, who are experts in finance and accounting, argue that the stock exchange of most developing countries can be easily influenced by political events and political changes.

Pakistan Stock Exchange shows worst June performance since 1999

While the Pakistan Stock Exchange has never stood out over the last nearly two decades, the recent downward trend has taken investors and finance experts by surprise, given the stock exchange’s newly-achieved Emerging Market status and the fact that it maintained its dominance in the MSCI FM Index in 2016.

In recent weeks, political events, the impending Pakistan election date and doubts from investors collapsed the Pakistan Stock Exchange. The result was a return of -2.6% and underperformance against MSCI’s Emerging Market and Frontiers Market Indexes.

The Pakistan Stock Exchange had its worst June performance since 1999 and its worst month since March 2015, according to The International News. Top Pakistani and international financial experts expected the country to witness inflows of $300 million to $500 million following the stock exchange’s upgrade to Emerging Market status, but in reality, there was an outflow of $82 million due to the recent downward trend.

Pakistan’s weight in the Emerging Market Index is only 0.14%, which is a far cry from its weight in the Frontier Market Index, which was 9%.

The Pakistan Stock Exchange hates uncertainty

The upcoming Pakistan election date probably takes the largest portion of blame for the latest negative trend in the nation’s stock exchange. However, the stock exchange may have also reacted to the deteriorating external account situation in the country. As of June 30, the account deficit during the 10 months of the fiscal year soared to $8.9 billion, the highest in nine years. At the same time last year, it was $3.2 billion.

In addition to the weakening performance of the Pakistan Stock Exchange, there is a high probability of sharp currency depreciation amid the vast account deficit. Interestingly, financial experts projected that the KSE-100 Index would reach a staggering 56,000 points by the end of this year, up more than 8,000 points from January 1.

Earlier this week, the Pakistani rupee dropped the most in nine years after the central bank was said to have devalued it as the country shows signs of panic and uncertainty ahead of the upcoming Pakistan election date. While it’s unclear if recovery is in the cards for the Pakistan Stock Exchange in the coming weeks, the government will have to calm investors and eliminate the growing feeling of uncertainty in order to pave the way for a positive stock index trend ahead of the election.

Whether Nawaz’s government remains after the Pakistan election date in 2018 or not, the Pakistan Stock Exchange hates uncertainty – and there’s no doubt about it following the index’s weakening performance.