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A tight bear hug

October 08, 2018

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The Pakistan stock market is in a tight bear hug. The benchmark KSE-100 Index has melted away by 13,000 points, representing a 24 per cent fall from its peak of 53,126 points touched on May 25, 2017. It has wiped off a staggering Rs2.3 trillion ($16.5 billion) from the paper value of corporate Pakistan.

Although several gurus in the market dispute the standard definition of a bear market measured by a fall of 20pc from the peak over a period of time, veterans sullenly nod when asked if the Pakistan Stock Exchange (PSX) has actually tumbled into a bear market.

No one can second-guess the market. When the entire investment community was celebrating the PSX’s entry into the MSCI Emerging Market Indices on that fateful day of May 2017, scarcely anyone knew that it marked the beginning of a long nightmare for investors in equities. A flurry of bad news has continued to trigger a bloodbath at the bourse.

The KSE-100 Index dropped 861 points (2.10pc) last Friday, the heaviest single-day decline since the new government took over. It also represented the third such free fall of shares in the current year

The KSE-100 Index lost 861 points (2.10pc) on Friday, the heaviest single-day decline since the new government took over. It also represented the third such free fall of shares in the current year.

Besides the widening of the current account deficit, quickly depleting foreign exchange reserves, which hit their four-year low of $8.4 billion on Sept 28, are at the heart of the economic malaise.

Brokers and analysts are divided along party lines and many are quick to roll up their sleeves on suggestions of a slack handling of the economy by the Khan government.

They dispute the fact that the government was unable to fetch enough from expatriates who were urged to remit $1,000 each or make any significant progress on arranging bilateral funding from two of the closest friends, China and Saudi Arabia, to help replenish foreign exchange reserves.

Brooding market-makers have come to terms with the idea that the only option is to approach the lender of last resort: the International Monetary Fund (IMF).

Already suspicious of a hard bargain, investors were spooked last week when the IMF observed that more steps were required to stabilise the economy and control the deficits. It also called for exchange rate flexibility, further tightening of monetary policy and adjustments in fiscal policy for better revenue generation.

Elixir Securities Research Director Hamad Aslam believes that the economic picture will be clear by the end of September. He says that the economy needs to post a recovery.

“But that is contingent upon the government taking immediate steps to control the import bill and entering the IMF programme”, he says, adding that if those tough decisions are not taken immediately, it will increase the risk of a hard landing.

But others disagree. A senior market strategist contended that quick structural measures could result in serious shocks to the economy: exceptionally high interest rates and utility prices will increase the cost of doing business, hit the underlying profit of companies and impact their stock prices.

The government finds itself between a rock and a hard place: it has to take tough decisions without risking a vote bank loss.

The biggest spoiler in the market is the band of foreign investors. They have sold off equities worth $362 million year-to-date.

“Although much of the foreign outflow is concentrated in sell-offs in heavyweights like Oil and Gas Development Company, Habib Bank and United Bank, the exodus of foreigners is enough to unnerve local individual investors.”

Other major sellers include banks that sold stocks worth $69.6m. Brokers’ proprietary trading amounted to a sell-off of $36m and that by mutual funds equalled $12.3m.

The mutual fund industry has grown to the size of Rs614bn. It is well-positioned to set the direction of the market.

“Most funds are about 87pc invested compared to 95pc in the heyday of the market, which means there is no dearth of liquidity,” says Yasir Qadri, CEO of UBL Funds, which is the fourth largest fund in the industry with assets under management of Rs70bn. He insisted that there was no run for redemptions, adding that no significant sums switched over to money market funds from equity funds.

Others noted that corporate entities had parked almost all surplus cash in government securities, mainly treasury bills that fetch a yield of 8pc over a 12-month period.

Amin Tai, a veteran broker and value investor who no longer manages public portfolios, keeps up his sangfroid. “It is just a matter of time before the economy is cured of its malady,” he says, noting that investments in equities provide a steady return over the long term as opposed to most other investment avenues.

Mr Tai criticised institutional investors for failing to put a floor under the market fall. He particularly mentioned State Life Insurance Company of Pakistan, which was sitting pretty on a huge pile of cash.

“Unlike mutual funds, State Life has no worries about maturity or redemptions. Still it keeps itself aloof from high-yield equities.”

Most active brokers were also putting up a bold front as their livelihood depended on selling optimism: “The drag on the market is mainly view-based,” argued one, meaning that the plunge was sentiment-driven. They pointed to the attractive valuation of stocks at eight times their forward earnings.

“Let the dust settle on the economic front and the market is ready to stage a stunning rebound,” he said.

Published in Dawn, The Business and Finance Weekly, October 8th, 2018