Last week witnessed a cheerful song and dance by Ghaffar Bhai Memon in the trading hall of the Pakistan Stock Exchange (PSX) and some chest-thumping by Minister for Communications Murad Saeed in the National Assembly for the same reason.

From Oct 1 to date, stocks have yielded stellar returns of 16.2 per cent, which helped the PSX grab the global spotlight as the best-performing market in the world.

The local bourse also stood out as the sixth best-performing market since it hit the pit in August. But the trouble is that calculations do not work that way. Its growth has to be seen on a year-on-year basis.

After five good years, the PSX produced negative returns of 15pc and 8pc in 2017 and 2018, respectively, which made it one of the worst-performing markets globally. It remained so until just two and a quarter months ago.

Investors do have reason to rejoice: last Thursday, the benchmark index recovered all of its 2019 losses. It crawled out of the red as the KSE-100 index limped past 37,066 points, a level last seen on Jan 1, to reach 37,243 points on Nov 14.

A steep drop in the returns on government papers has buoyed investors’ confidence

Traders and market gurus are selling optimism. But politics is still murky. The country is grappling with the sit-ins by the followers of Fazlur Rehman across the country and the wrangling between the government and the PML-N over the issue of overseas medical treatment of the ailing former prime minister, Nawaz Sharif. Meanwhile, inflation was recorded at a higher-than-expected level of 11.04pc for October, highest among regional peers. So what has really happened that brightened up equity investors?

PSX’s former chairman Arif Habib mentions several reasons for the recent rally: the success of stabilisation measures, which was also endorsed by the International Monetary Fund (IMF), stability of the rupee, undervalued blue-chip stocks, growth in the profits of four major sectors — oil and gas exploration and production, power, textile and banking — and the MSCI retaining Pakistan’s place on its index allaying the fear of a downgrade.

Above all, a steep drop in the returns on government papers — mainly treasury bills whose returns dropped from an average of 14pc to 11.25pc — has buoyed investors’ confidence. “For the first time in a decade, treasury bill yields have sunk below the policy rate,” Mr Habib said. This led to a cut in the rate of returns on National Saving Schemes, triggering hopes that funds would now flow into the equity market.

According to the State Bank of Pakistan (SBP), the net inflow in treasury bills and bonds from July 1 to Nov 12 was $714 million, with 99.6pc of the funds going into treasury bills that have maximum one-year maturity. Investment from the United States amounted to $427m, United Kingdom $279m and United Arab Emirates $5m.

As for the first quarterly review conducted by the IMF from Oct 28 to Nov 8 under the $6bn loan programme, the international lending agency stated that all performance criteria for the end of September were met with comfortable margins and progress was continuing towards meeting all structural benchmarks. “The government’s politics have started bearing fruit, helping to reverse the build-up of vulnerabilities and restore economic stability. The external and fiscal deficits are narrowing, inflation is expected to decline and growth, although slow, remains positive.”

Topline Securities CEO Mohammed Sohail observed: “The recent rally is mainly triggered by macroeconomic stability. Falling bond yields and a stable rupee have compelled investors to put money in stocks, which are trading at a below-average, attractive price-to-earnings (P/E) ratio of six.”

He mentioned that a number of investors were now selling government bonds and dollars and funnelling their funds to stocks. The increasing participation that has swelled the volume of shares traded gives credence to that assertion. On Nov 13, the traded value of stocks reached Rs10.75bn, highest in 2019.

But the KSE-100 index has still to recover 30pc to get back to its all-time high of 53,127 points reached in May 2017. Stock prices are nowhere near the peak of May 24, 2017. Investors have burnt their fingers in a lot of stocks. Closing prices of some stocks on May 24, 2017, and Nov 12, 2019, are as follows: Pak Elektron, a cable and electrical goods stock, saw its share price touch Rs116 in May 2017. It is now traded at Rs22. Similarly, Engro Foods fell from Rs159 to Rs73, Sui Northern Rs168 to Rs74, PSO Rs465 to Rs172, Attock Refinery Rs452 to Rs105, Maple Leaf Cement Rs118 to Rs20, Lucky Cement Rs963 to Rs390, Millat Tractors Rs1,550 to Rs634, ICI Rs1,160 to Rs558 and so on.

Investors are now returning in droves as the market fortunes seem to be changing for the better, said Hussain Haider, head of research at JS Global Capital. “The three kings that were quick to cash in on the first-come-first-served dynamics of the equity market were individuals, other organisations and companies.” He stated that even a spark can seem bright in darkness and the debatable improvement in macroeconomic indicators proved to be reasonably sufficient to support the recent bull rally. He expressed hope that buying dips would overshadow the selling rallies going forward.

A table prepared by brokerage Next Capital shows individuals have invested $95m in the equity market since Jan 1, followed by foreign investors ($67m), companies ($31m) and other organisations ($28m). The two spoilers have been insurance companies that sold shares amounting to $67m and mutual funds that dumped stocks worth a massive $195m.

Published in Dawn, The Business and Finance Weekly, November 18th, 2019