THE stock market may have closed one of its worst weeks ever last Friday. In four days of trading, the market lost almost 4,000 points and market cap worth Rs653bn was incinerated in a selling frenzy the likes of which has rarely been seen.

The fact that this happened on the day the index was upgraded to Emerging Market status, fanning expectations of an inflow of almost half a billion dollars, added irony to the debacle.

For the moment, it is difficult to tell where this will end, but panic must be avoided since there are no material changes other than the reindexation that could be said to be driving the declines.

In the clichéd parlance of stockbrokers, the fundamentals remain sound.

What is highlighted by the whole episode, however, is the ease with which brokers can build hype around any event that impacts the stock market.

In the run-up to the upgrade to Emerging Market status, we heard a lot of stories about how Pakistani stocks would now soar because their price-to-earnings ratios were significantly undervalued compared to their peers in emerging markets.

The less sophisticated of the lot sold stories about massive inflows that are about to come in and lift all boats in the stock market. Much of that may yet happen, and the selling pressure could subside soon.

But the ease with which hype trumps all on the stock market should make retail investors wary of the tales told by the brokers.

What is clear is that the market prices in such events long before they become public knowledge.

The fact that the PSX rose steeply for months in the run-up to the upgrade, breaking the 50,000 barrier in January before tapering off, was one indication that it might be overbought.

The giddy expectation of a huge rise in the index immediately following the upgrade led many market players to take out positions that were far riskier than they would otherwise have taken.

Clearly, those managing foreign emerging market funds are not so foolish as to come rushing into an overbought market simply because it has just been upgraded.

Eventually, the selling will subside, and the market will find its footing, and foreign investors will make their entry, but a correction is obviously required before that happens.

For now, the episode should bring home the old lesson for small investors, that the stock market is no place to take risks with one’s nest egg and hard-earned savings.

Keep a long horizon, be wary of elaborately built-up hype, and stay calm during periods of panic.

These are the rules for surviving and winning in this stock market. Greed and the lure of rapid returns can leave even the best of them battered and bruised.

Published in Dawn, June 5th, 2017

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.