KARACHI - The outgoing financial year ending June 2008 turned out to be a difficult year for the Karachi Stock Exchange, which after witnessing a bull-run for six consecutive years (FY02-07), ended with a negative return of 11 per cent and closed at 12,289 level. Market Capitalization trimmed by 17 per cent from $66.5 billion to $55.3 billion. Market recorded all-time high and also showed sharp decline during the year. The financial year turned out to be a difficult year for Pakistan market. In FY08, the market posted a negative annual return of 11 per cent in local currency terms, 21 per cent in US$ terms against 6-years from FY02-07 average annual return of 48 per cent in Rupee terms, 50 per cent in US$ terms. Though KSE-100 touched its all time high of 15,676 on 18 April, 2008, the index couldn't sustaine its upward momentum and closed the fiscal year at 12,289 level, down 22 per cent from its peak. Uncertain political situation and weak macroeconomic fundamentals were the major reasons behind this massive correction. However, contrast performance can be observed, if comparing the market's performance on half yearly basis, as the market has gained a 2.2 per cent in first half from July-December FY08 as against a negative return of 12.7 per cent in second half from January-June FY08. This uninspiring performance was mainly attributed to prolonged political uncertainty, coupled with steep deprecation in Rupee against US dollar amid unfavorable balance of payment position. Moreover, rumours regarding implementation of Capital Gains Tax before the budget and SBP's continued tightening of monetary policy to curb soaring inflation also hampered performance of Pakistan Market. Despite fall in most of the regional markets, KSE's performance was rather unimpressive as MSCI Emerging Asia (ex Japan) fell by only 6.6 per cent. However, it still outperformed peers such as Taiwan, Malaysia, China and Philippines. In FY08, the average daily volume in ready market stood at 241.6mn shares (up 14 per cent), whereas average volumes in futures market fell by 10 per cent and stood at 53.6mn shares. In terms of value, average daily volumes were US$411mn in cash market up by 11 per cent while in futures it was US$143mn up 0.6 per cent. On WoW closing basis, the market witnessed 27 positive closings with remaining weeks ending in red zone. Among key sectors, fertilizers and E&P sectors remained top performers with returns of 18.5 per cent and 5 per cent, respectively in their capitalization. Performance of the two index heavyweights was more than offset by dismal performances by banking and telecom sectors, which registered a decline of 40.6 per cent and 30.8 per cent, respectively. Banking sector came under pressure after the removal of Forced Sale Value benefit which resulted in higher NPL's for the sector. Moreover, continued monetary tightening from the central bank which increased discount rates by 250bps during FY08 also had an adverse effect on the sector's performance. Similarly, telecom sector's under performance was mainly attributed to one off huge VSS cost of Rs23bn borne by the sector's giant PTCL. According to central bank cash flows numbers, during FY08, total outflow of foreign portfolio investments was recorded at US$221mn (as of June 27, 2008), as against net inflows of US$978mn, recorded in FY07. While the country witnessed an inflow of US$39.8mn during the first half of FY08, uncertain political environment coupled with liquidity crisis in international markets led to an outflow of US$261mn in the second half. From the beginning of 2008, NCCPL started releasing foreign investment data. According to data released by NCCPL, net foreign selling in the local market during second half of FY08 stood at US$250mn.