The stock market is enduring its longest bearish spell ever.

Market capitalisation eroded by more than $60 billion — from $100bn to $40bn — in just two years.

The benchmark KSE-100 index has tanked to 32,446 points, representing a drop of 39 per cent from its all-time high of 53,124 points on the eve of its upgrade to the MSCI Emerging Market in May 2017.

Even blue-chip stocks are now available at over 50pc discounted valuations. The price-to-earnings (P/E) ratio has crumbled to less than six times forward earnings — last seen during the market crisis of 2008.

But for there are two observations that set apart the current downturn from all the past market crashes. One, investors have lost their collective voice. There are no rowdy crowds of protesting investors hurling stone and abuses at brokers.

Two, neither the regulators nor the government is coming to the rescue of equity investors who have lost a substantial part of their savings. Arif Habib, a former chairman of the bourse, does not agree that the market has been left to fend for itself. He recalled that Finance Minister Abdul Hafeez Shaikh had given his consent to a market support fund of Rs20bn in mid-May. He had sought the approval of the Economic Coordination Committee (ECC) of the cabinet and conveyed that the fund could begin stabilising the market soon.

Even blue-chip stocks are now available at over 50pc discounted valuations

A fund manager concurred that the delay occurred owing to the limit placed by the International Monetary Fund (IMF) on sovereign guarantees. The financiers of the fund — National Bank of Pakistan, State Life Insurance, Employees’ Old-Age Benefits Institution and National Insurance Company — were being provided with letters of comfort instead.

Most market analysts wonder if the proposed buying of shares in eight government-owned enterprises — Oil and Gas Development Company, Pakistan State Oil, Pakistan Petroleum Ltd, Sui Southern Gas Company, Sui Northern Gas Pipelines Ltd, Pakistan Telecommunications Ltd, National Bank of Pakistan and Kot Addu Power Company — by an NIT-managed fund will put a floor under the market fall.

At least it will provide investors with some confidence. They may begin to visualise their future with optimism. A former regulator has on many occasions asserted that the market is “10pc economics and 90pc psychology”.

Incidentally, the financiers of the fund have sought to keep their own money safe from the market. Several stock-watchers gave a perfectly understandable explanation: no one at the head of a government institution wants to make a mistake where public money is involved for fear of becoming a target in the current atmosphere of search and seize.

Small investors, meanwhile, stampede out of the market with fingers burnt. The ban on leverage financing has proved a blessing in disguise for small investors who could only bite as much as they could chew. Buying on borrowed money (leverage or badla) had severely hurt small investors during the last stock crisis in 2008.

Investors are now pinning hopes on foreign investors. Foreigners continued to exit Pakistan for four straight years until 2018. But the trend appears to be changing. Foreign inflows amount to $73.7m year to-date. Market strategists calculate that foreign portfolio investors hold around $4.7bn in Pakistani equities at the moment. Out of this amount, $1.6bn relates to portfolio investment while the rest consists of strategic holdings.

Intermarket Securities Executive Director for Research Raza Jafri says that given the 39pc stock meltdown in addition to the rupee depreciation of 50pc, foreign investors are currently looking at Pakistani blue-chip companies that are available at a discount of as much as 89pc. He believed that foreigners were still shy of taking fresh positions lest the value of the rupee depreciated further. “The rupee should settle by Oct-Dec, which could pitch foreigners on an aggressive buying spree,” he said.

Foreigners may offer a ray of hope, but major spoilers of the market are the mutual funds that have sold equities worth a whopping $157m year-to-date. According to a fund manager, most unit holders are small savers who get easily scared and demand redemptions.

Mr Habib believes that by the autumn of the current year, interest rates can start coming down. He pointed out that the PIB auction last week indicated the softening of interest rates as shorter-tenor bills received prominence.

Alluding to the allure of the current stock prices after the heavy depreciation of the dollar, Mr Habib reckons that the ongoing projects have reached a discount to the book value and are at a deep discount to the replacement value.

Many corporate analysts do not see widespread corporate earnings deterioration. They maintain that in spite of the economic slowdown, companies in fertiliser, banking, power and oil and gas exploration sectors are doing well. According to Mr Jafri: “In the next few months, local mutual fund selling could dominate. But as foreign buying picks up, the market should see a strong rebound.”

Published in Dawn, The Business and Finance Weekly, July 29th, 2019