PSX: shocks and aftershocks

February 17, 2020

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Investors felt a surge of anxiety at the end of the first trading day of the preceding week that saw a carnage, leaving the benchmark index with a loss of 847 points or 2.1 per cent. A massive sum of Rs142 billion was wiped out from market capitalisation.

The index broke the psychological barrier of 40,000 points and settled at 39,297 points. It was amusing, therefore, to see an official statement by the Ministry of Finance the next day that termed the stock market commentary “unfortunate”.

The ministry urged “careful reporting as such reports highlighting sharp volatility in the market damage the interest of small investors and create uncertainty”. Did the ministry stop short of advising commentators that reports on the index taking a downward spiral should not be published?

That the commentary on the stock market’s performance worried the country’s money managers was surprising. After all, a correction following the massive rally of 50pc that began in August 2019 when the index had tanked to 28,765 points was not unpredictable.

But the subsequent market meltdown of 10pc in four successive weeks spooked investors with respect to the state of the economy and an uncertain political situation. While the shrinkage of the current account deficit, hike in foreign exchange reserves and stability in the exchange rate offer some comfort, stunted GDP growth, a shortfall in revenue collection and the likelihood of more taxes are a cause for concern for investors.

The cautionary note by the Ministry of Finance released on Feb 11 appears to have been drawn in haste

But above all, the reason for Monday’s stock market plunge was the January inflation number, which was at a 10-year high of 14.6pc. It fuelled fears about a delay in monetary easing by one quarter. The inflation number, above the market consensus of 13-13.6pc, dampened investor sentiments.

Pakistan Stock Exchange (PSX) Chairman Sulaiman Mehdi said (on that day) the market was reeling from the aftershocks of higher-than-expected January inflation figures. It poured cold water on investors’ hopes about an interest rate cut by at least 25 basis points. Further evidence of high interest rates likely continuing for now was provided by the surge in bond yields.

The second major concern that triggered selling was the scare of coronavirus that drove away active foreign funds from global markets. The PSX also witnessed a major sell-off by foreign investors. The rout at the bourse was also exacerbated by the revocation of the suspension orders against a brokerage house, Azee Securities. It foiled the market attempt to recover in the last trading hour as investors worried about the possibility of distress selling by the house.

A senior member of the Policy Board of the Securities and Exchange Commission of Pakistan (SECP) often asserts that the market is 10pc economics and 90pc psychology. Tuesday’s note by the Ministry of Finance appears to have been drawn in haste for it rightly mentioned one of the reasons for the plunge in stocks on Monday. It referred to the rumours that the whole economic team, including the adviser to the premier on finance as well as the central bank governor, was being replaced — which spooked investors.

But the statement failed to mention the other issues like the 10-year high inflation number and the uncertainty about the mini-budget and the Financial Action Task Force (FATF) decision about Pakistan’s status expected this month.

The index recovered 417 points or 1.06pc on Feb 11, which barely made up for the plunge of 2,489 points or 6pc in the earlier two weeks. Stocks had declined for four weeks in a row. They were on a slippery slope for three of the five trading days last week. They also recorded another major fall of 212 points on the last trading day of the week. All these developments failed to instil confidence among shareholders.

Sentiments of small investors are scarcely dented by the stock market’s daily performance report. According to analysts, almost a half of the 250,000 investors already left the market after burning their fingers in the crash of May 2017, which is still short of 25pc recovery from the all-time high of 53,103 points.

Investors were unlikely to jump with joy upon being reminded about the negative returns in the last three years. And finally, the Ministry of Finance pointed out that the index upsurge between August 2019 and January 2020 was 50pc on the back of corrective measures that the government took to reduce twin deficits.

While that may be true, the gauge to measure market performance is never five months. It is either year-on-year or from the start of the calendar year to date. According to the PSX website, the stock market is in the red by 0.74pc over the last one year and it has provided negative returns of 1.2pc since January.

Lastly, the official statement contends: “Foreign portfolio investment in the stock market during the first six months of the current fiscal year has also stood at $18.8m after four years of heavy selling by foreign investors.”

The ministry needs to revisit that number. According to reports based on figures provided by the National Clearing Company of Pakistan, foreign investors have been major sellers of equities worth $21.94 million in just one and a half months (Jan 1 – Feb 13). They have sold off stocks worth $13.92m in the current fiscal year so far.

Published in Dawn, The Business and Finance Weekly, February 17th, 2020