Pakistan stock markets gave 84% returns last year. Now, it’s a crash after crash

medium120996415The Pakistan stock market gave investors a "world-beating" 84% return last year. It was its biggest annual gain in 22 years. And it was projected to gain another 30% in 2025. "You don't have to stretch your imagination to make an investment case for Pakistan," Morgan Stanley had said earlier this year. But now, one would have to try hard to do that.On May 7, when its markets opened about eight hours after India’s strike on terrorist infrastructure in Pakistan, its benchmark index KSE-100 crashed more than 6,500 points. The following day, May 8, was worse. By the end of the day, KSE-100 had lost about 6,500 points, KSE-30 more than 2,100 points, and KMI-30 more than 11,400 points.But it isn’t just the period after India’s strike. Since the Pahalgam attack, the Pakistan stock market has been bleeding — April was the "worst month" for its stocks since 2023, Bloomberg reported. Yes, there have been global pressures like the US tariffs and oil prices, but it has been the sentiment around the deteriorating relationship with India that has dragged its market down.What has it lost since the Pahalgam attack?The benchmark index has dropped more than 10,000 points, or a 12.6% drop in two weeks. On April 21, Pakistan’s headlines about its stock market were exuberant. Its benchmark index had surged over 1,000 points and added 119bn PKR (Pakistani rupees) to its value in a single day. But it was only continuing a long positive run. Its credit rating had gone up, the IMF had granted it a more-than-billion-dollar climate resilience loan, China had extended the repayment period for a $2bn loan to Pakistan, and the Pakistan government was working out plans to fix circular debt.The following day, the Pahalgam attack took place. Pakistan’s benchmark index stayed flat.But within a day, on April 23, the plunge began. The KSE-100 lost more than 2,000 points after India announced suspension of the Indus Waters Treaty against Pakistan. On April 30, a statement by Pakistan’s information minister Attaullah Tarar about the possibility of an Indian strike drove the benchmark index down more than 3,500 points in a day. And on May 7, a day after India launched strikes on nine locations targetting terrorist infrastructure, KSE-100 plummeted more than 3,500 points in a day. Trading had to be suspended briefly, Dawn reported, because of the “massive dip”. By the end of the trading day, it had plunged more than 2,000 points. The KSE-30, the other closely watched index, dipped more than 1,000 points. And the Shariah-compliant KMI-30 index, a benchmark of 30 stocks that follow Islamic investment principles, fell 7,000 points in a day. By the end of Wednesday, of the 447 stocks traded on the Pakistan Stock Exchange, 80% were in the red. On May 8, the plunge continued. After what seemed like a recovery in early hours of trading, the sell-off resumed. By afternoon, the exchange halted trading after a nearly 7,000-point drop in its benchmark index. In absolute terms, the day saw the single largest drop in the KSE-100 in three decades (but that’s also because of the larger base now). In actual terms, the drop was among the 20 worst days of the index’s history in the past three decades. !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r,i=0;r=e[i];i++)if(r.contentWindow===a.source){var d=a.data["datawrapper-height"][t]+"px";r.style.height=d}}}))}(); !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r,i=0;r=e[i];i++)if(r.contentWindow===a.source){var d=a.data["datawrapper-height"][t]+"px";r.style.height=d}}}))}(); How Pakistan’s stocks react to conflict shows how people weigh fear and opportunityOver the past three decades, the largest single-day drop in the KSE-100 (more than 12% in a day) was recorded on June 1, 1998 — the day the markets opened after Pakistan conducted nuclear tests, days after India did. Likewise, when the Kargil War broke out, between May and July 1999, the Pakistan stock market swung wildly. On May 26, the day Indian air strikes began in Kargil, the KSE-100 crashed more than 6.5% in a day. Within a month, it dropped another 20%. And in two weeks of 2019, between the Pulwama attack and the Balakot strike, Pakistan’s market crashed 4%, dropping about 2,000 points. It lost more than PKR 300bn of market capitalisation that month.None of this is surprising. But Indian stocks have historically been more resilient to bilateral standoffs. In 2014, a study found that Pakistan’s stock market was “more sensitive to India-Pakistan relations” than India’s stock market — it responded significantly to both positive and negative political news. And any military news coming out of India — like an increase in India’s military arsenal — affected Pakistan’s stock market significantly but didn’t move the needle in the Indian stock market. This time, too, after India’s strike on Pakistan, Indian equity benchmarks didn’t crash and ended more or less flat.boxcontentThe consolidation of Pakistan Stock Exchange1947: Karachi Stock Exchange (KSE) set up1949: KSE formally incorporated1970: Lahore Stock Exchange established1989: Islamabad Stock Exchange set up1991: KSE-100 Index launched1991: Pakistan allows foreign investments in KSE2012: Demutualisation of the three stock exchanges, converting them into companies limited by shares2016: The three stock exchanges integrated into the Pakistan Stock Exchange2016: Sale of 40% stake in Pakistan Stock Exchange to Chinese-led consortiumA sidenote: There’s a China stake hereAfter the Indian strike on May 7, Chinese defence stocks shot up — an index of Chinese defence companies jumped to a two-week high. And a fighter jet maker was among the biggest gainers, rising the most since October 14, Bloomberg reported. Pakistan has been buying a large share of its arms from China.But there’s a stronger China connection to this story.In 2012, Pakistan announced a strange reprieve — until mid-2014, investors were allowed to buy shares with “no questions asked about where the money came from”. The average trading volume doubled, The Economist wrote at the time.By 2016, Pakistan was in the middle of a run as one of the best-performing markets in Asia. That year, a Chinese-led consortium bought a 40% stake in the Pakistan Stock Exchange for $85mn. The KSE-100 had gained 42% that year, and Morgan Stanley Capital International (MSCI, the influential investment research firm) had announced that it would upgrade Pakistan’s equity market from frontier (meant for small, volatile and unpredictable markets) to emerging (larger, more stable, more open). (But it was downgraded to a frontier market again, in 2021.)The consortium had three Chinese exchanges — China Financial Futures Exchange, Shanghai Stock Exchange, and Shenzhen Stock Exchange — and two Pakistani financial institutions — Pak China Investment Company Ltd and Habib Bank Ltd. The Chinese shareholding was 30%. And for Pakistan, the Chinese-led stake was supposed to “bring in investment, experience, technological assistance and new products like options and futures”. For instance, in 2019, the Pakistan Stock Exchange decided to buy a trading and surveillance system worth $2.85mn from the Shenzhen Stock Exchange. (It took a while to set up, but glitches and delays cost the stock exchange more than PKR 460mn in a week of operations, and the old system had to be brought back for a bit.) When the Pakistan Stock Exchange crashes, however, there is little reaction from Chinese stakeholders, a Dawn report from 2020 said. “They are not fixated on the daily change in stock prices,” Dawn had quoted a market participant from Pakistan as saying.Initially, for China, the stake was meant to mobilise funds for what was then the $46-bn China Pakistan Economic Corridor (CPEC, in which Chinese investment is estimated to have crossed $60bn by now). Within two years, a Chinese consortium — which included the Shanghai and Shenzhen stock exchanges — would also acquire a 25% in the Dhaka Stock Exchange for $125mn. Strategic investment of this sort has been part of China’s broader quest for financial influence.