Pakistani investors were counting the cost this week of a painful end to an extraordinary bull market run.

The Karachi Stock Exchange declared a halt this week to a payments crisis that has seen share prices tumble by a quarter in little more than a fortnight.

The move coincided with fresh buying from Pakistan’s main public sector mutual fund, the National Investment Trust, and brokers who are believed to have been given fresh loans by local banks. This prompted a mid-week rally.

But the KSE slumped a further four per cent yesterday, evidence that confidence remains fragile. after the crash in share prices since mid-March

The Karachi stock market had been one of the fastest growing emerging markets, rising sharply in the past three years since Pakistan joined the “war on terror”. Generous US-led economic support to Pakistan’s military ruler, General Pervez Musharraf, had helped lift sentiment.

Once on the brink of default, on its foreign debt repayments the country saw a sharp improvement in its balance of payments position.

The KSE-100 index rose more than eight times to its March 15 peak of 10,313 points. Between the start of the year and March 15 alone, the index leapt 65 per cent amid a flood of speculative buying by retail investors.

The crash was triggered by a liquidity crunch related to this week’s settlement of the futures. The slide has taken the KSE 100 back back to 7,770.33 and provoked a riot by small investors outside the Karachi Stock Exchange last week.

The repercussions are still being assessed. “No one knows how substantial are the losses,” said the president of one Pakistani bank.

The crash has raised questions over short-term financing with loans using exorbitant interest rates, known as badla or carry-over trade.

Badla works informally in the Karachi market, where lenders regularly give out loans to investors. In the bull run, investors were borrowing heavily to buy shares.

This week, the badla rate was hovering between the annual interest rate of 22 and 25 per cent, though it is believed to have risen as high as 70-80 per cent at the peak.

“For the future, one big lesson ought to be how far we should closely watch the badla rate,” said Tariq Iqbal Khan, chairman of NIT, a mutual fund.

Officials in Islamabad said they were considering more rigorous measures to regulate badla and discourage investors from too much debt exposure. That was one factor behind yesterday’s fall.

Analysts said the outlook was uncertain even if the market was not expensive, with KSE 100 companies trading on a prospective price earnings multiple of 12 times.

Arshad Arif, chief analyst at Khadim Ali Shah Bukhari group, said the future trend partly depended on Pakistan’s privatisation programme, billed as a cornerstone of government policy.

“If the privatisation of large companies, especially plans to privatise Pakistan Telecom, this year turn to reality, there could be fresh buying from investors,” he said.

But western commentators have warned that the Karachi stock market remains at risk due to continuing political uncertainty.

“The risk comes from how Pakistan is run. Such centralised authority under one military leader always creates the danger of abrupt political changes that could undermine the stock market at very short notice,” said one.

Get alerts on Markets when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.

Follow the topics in this article