The market sentiments, barring Friday, remained bearish where Wednesday witnessed frantic selling, as at one point the market dipped 1,006 points, its largest fall since August 11, 2014. Continuous foreign selling driven by winding up of a certain foreign fund and fears of earlier-than-expected rate hike by the US Federal Reserve along with disturbed political and law & order situation in Karachi played havoc with investors’ sentiments during the outgoing week. Net foreign selling during the week clocked in at US$24mn, taking month-to-date foreign selling to US$56mn.

However, US$877mn Current Account (C/A) surplus for Feb 2015 and expectations of interest rate cut in the Monetary Policy Statement (MPS) over the weekend led to value buying on Friday (+349 points). Hence, the KSE-100 closed the week at 31,800 (down 3.4% WoW), with thin average trading volumes of 141mn shares/day (down 0.2% WoW). E&P stocks remained under pressure as oil prices slipped further, while expectations of a rate cut kept banking stocks depressed.

Experts said that Pakistan market is down close to 10% from its recent peak in last 6 weeks. Pakistan has lost all gains of 2015 while MSCI Pakistan is down 3%. This is mainly due to foreign selling and political noise. Moreover, uncertainty regarding profit outlook of Oil and Bank sector (with combined weight of 42% in benchmark KSE-100 Index) is also affecting the market. As overall economic situation is improving probability is high that market will recover these losses in next few months.

Foreigners have been net sellers on monthly basis since Dec 2014. In last three and a half months, they have sold shares worth Rs16.6bn/US$165.6mn (on net basis). In 2015-to-date net selling is Rs11.6bn/US$116mn. Selling of K-Electric (KEL) shares by offshore shareholders alone was Rs6.6bn/US$65.7mn. Foreign portfolio investment was US$1.2bn in last 3-years. As of Mar 6, 2015, foreign funds hold US$6.3bn (9% of market cap, 32% of free float).

Locals especially Mutual Funds and Individuals who were very active and building their exposure in equities, thanks to falling interest rate, seems already invested now. Local funds net buying since Dec 2014 is Rs9.9bn/US$98.5mn. As part of operation against terrorists, law enforcement agencies in Pakistan raided the head office of fourth largest political party. As a result, investors are cautious about any political repercussions due to this.

After falling by 19% in 2014, KSE’s Oil and Gas Sector is further down 8% in 2015 underperforming the broader market. This is mainly due to uncertain outlook of global crude oil price that affects the profitability of E&P and OMCs. Similarly, investor’s favorite, banking sector has underperformed and is down 11% in 2015 YTD. Falling interest rates and lack of clarity on State Bank of Pakistan (SBP) Target Rate will have an impact on bank’s margins, forcing investors to trim their positions. Last but not the least is share offerings impacting cash liquidity. In 2014, with Initial Public Offering (IPO’s) of Rs73bn/US$715mn hitting the local market, index gained 27% (US$-based 33%) as foreigners net buying was Rs69bn/US$687mn. This year there is plans of approx. Rs150bn/US$1.5bn offerings. And it looks like that these mega offerings, if they come to the market, will affect cash liquidity. Thus, fear of additional supply is also affecting the market.

Foreign selling is not a regional trend. Other Asian frontier markets (FM) like Vietnam and Sri-Lanka has witnessed net buying in 2015-to-date.

KEL alone is US$65.7mn of net selling in last few months. As there is no regional trend of selling by foreigners chances of this trend of selling cooling down is higher.

Mega offerings especially Habib Bank Limited’s (HBL) offer of US$500-1,300mn is also a cause of concern. But it will be interesting to see what Government of Pakistan do after Oil & Gas Development Company’s (OGDC) offer was rejected due to lack of interest.

If there will be lower than expected response for HBL then it may result in the reduction in size of the transaction or deferment of the deal, which will be positive for the market.