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Market uncertainty

July 18, 2017


STOCKS have been hit by a strong bout of volatility since at least May when a sustained bull run hit choppy sentiments. In recent days, the declines have been so spectacular after some trade sessions that they have set records and rekindled memories of 2008. All the stories that we were fed since the bull run began last year have been demolished since the declines kicked in after May, laying waste to the elaborate analyses and narratives put out by various brokers. By now, it is abundantly clear that few, if any, know how far these declines will go, and whether or not the peaks that the index hit this winter will ever be scaled again. The uncertainty is proving too much for many small investors who have their valuable savings at risk.

The apex and front-line regulators are right to point out that they have no role to play in such declines, and especially not one that involves attempts to dampen the volatility or preserve investor value. This is a ruthless marketplace, where profits and losses must be swallowed with equal ease. Beyond ensuring that the payments and settlements system is working properly, that brokers are not over-leveraged or engaged in unethical trades, there is precious little for them to do. But it is also important to realise that the investor landscape has changed in significant ways since this regulatory framework was put in place. Mutual funds are playing a growing role these days, and capital-protected funds are particularly popular. These generate their own patterns of buying and selling due to commitments to their clients. These patterns can today be drivers of volatility. There is nothing unethical about these funds, but perhaps it is worth asking how far the regulatory framework has evolved to keep pace with the changes sweeping through the investor landscape. Are there reforms that can help small investors better understand the risks involved in the stock market, and is it possible for the regulators to keep a closer watch on the hype through which buying activity can be generated? Most people are being told that the political crisis in Islamabad lies at the heart of the declines, but more savvy investors know that the crisis is at best catalyzing a trend that was going to come around in any case.

Published in Dawn, July 18th, 2017

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