Pakistan markets tumble amid war fears, set for worst month since 2023: report

• Outlook in the near term is uncertain, says Hugger.
• He says small rally in bond, equity prices likely.
• Fall in bond prices offers good entry points, says Avanti.

As rising tensions with neighbour India shake investors confidence, dollar bonds and stocks in Pakistan are set for their worst month since 2023, Bloomberg reported, The News reported.

Amid the fears of war with India, Pakistani stocks underperformed their counterparts in April, as the rupee and dollar bonds both declined. India will take military action within the next 24 to 36 hours, Federal Minister for Information Attaullah Tarar said, who also stated that Pakistan would react "assuredly and decisively."

After 26 people were killed in an attack in the Illegally Indian-Occupied Jammu and Kashmir’s Pahalgam area on April 22, relations between the nuclear-armed rivals grew worse. Pakistan has dismissed the allegations of involvement in the attack.

Thomas Hugger, chief executive officer and fund manager of Asia Frontier Capital Ltd. in Hong Kong, said: "The outlook in the near term is uncertain, so we can expect further slight weakness because additionally, the US tariffs are an overhang."

“Any de-escalation of the tension will obviously calm down the nervousness of investors regarding further deterioration of the fragile relationship between the two countries and we can expect a small rally in bond and equity prices,” Hugger added.

Dollar bonds have handed investors a loss of nearly 4% this month, while equities are down almost 3%. Meanwhile, Indian assets are proving relatively immune for now with stocks and local bonds up this month.

Ahead of the incident, investor sentiment towards Pakistan was improving with a rating upgrade and falling oil prices. Stocks were coming off the biggest annual gain in 22 years, setting the stage for further gains as economic activity picked up in the country.

“The fall in bond prices in recent days offers good entry points,” Avanti Save, head of Asia credit research and strategy at Barclays Bank, wrote in a note. She maintains an overweight rating on the country.

Separately, Reuters reported that Pakistan’s international bonds dropped more than 1 cent on Wednesday after Islamabad said it has “credible intelligence” that India intends to launch military action soon as tensions escalate between the nuclear-armed neighbours.

The 2036 bond suffered the biggest decline, falling 1.3 cents to be bid at 71.85 cents in the dollar, Tradeweb data showed, though bid-ask spreads of around 1 cent pointed to limited liquidity.

Relations between the two countries have been fraying since the April 22 attack.