KARACHI STOCK MARKET CONTINUES DOWNWARD SLIDE

UNCLAS ISLAMABAD 003738 SIPDIS STATE FOR SCA/PB, EB/TPP, EB/IFD/OIA, AND EB/IFD/OMA USAID FOR ANE MWARD TREASURY FOR OSSA COMMERCE FOR ANESA/OSA MANILA PASS USED AT ADB STATE PASS USTR FOR RGERBER, DHARTWICK SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EFIN ECON EINV PREL PK SUBJECT: KARACHI STOCK MARKET CONTINUES DOWNWARD SLIDE ¶1. (U) The Karachi Stock Exchange (KSE) took another dive on August 23 on rumors of the Supreme Court's imminent decision to clear the Sharif brothers return to Pakistan. The market lost 319 points or 2.6 percent to close at 12,001 points, slightly less than its biggest one day loss on August 8 on rumors that the Government of Pakistan would declare a state of emergency. Volume of shares traded August 23 increased 25.2 percent over the previous day. Overall market capitalization declined by nearly $1.5 billion dollars, or 2.4 percent. ¶2. (U) The KSE has lost almost 18% of its value from its 2007 mid-July high, and, unlike other exchanges, shows no signs of recovery. In comparison, the composite of Dow Jones World Index excluding U.S. (DJWI ex. U.S.),a broad market index excluding U.S. based stocks, has begun to recover since bottoming out August 16. In August alone, the KSE has lost 12 percent of its value versus 6 percent for DJWI ex-U.S. Over the past year, the KSE has been about twice as volatile as the Dow Jones. (Note: the DJWI ex-U.S. was used instead of the regular DJWI because the U.S. markets have seen a higher rate of recovery over the past week than the rest of the world which could skew comparisons. End Note.) ¶3. (SBU) Comment: Observers remarked that growing uncertainty over Pakistan's political future has made investors wary of making equity investments here. This is clearly reflected in the volatility of the market here since June. The market has not bottomed out yet and, in our view, is unlikely to do so until Pakistan's political future is clearer. End Comment.