The PSX carnage, explained

Published March 16, 2020
On all three occasions  trading was brought to a halt and resumed after 45 minutes. — AFP/File
On all three occasions trading was brought to a halt and resumed after 45 minutes. — AFP/File

The catastrophe turned into a calamity at the Pakistan stock market last week when investors scrambled to dump shares and seek the safety of havens: gold and dollar. It started from the first trading day when a bloodbath was witnessed that sent shares reeling and the benchmark KSE-100 caved in by 2,302 points or 6.41 per cent, representing the heaviest single-day decline in 10 years.

All of that happened in just 7 minutes of the start of trading. The episode was repeated on Thursday and Friday. The market was rescued from crash by the new circuit breaker regulation made effective from December last year that provides the ‘’trading halt’’ mechanism which is triggered if the market capitalisation based KSE-30 index sinks by 4pc during the session and is unable to wriggle out of it in 5 minutes.

It provides a cooling period of 45 minutes which enables brokers to collect mark-to-market margins from leveraged players to mitigate systemic risk at the market. On all three occasions (Monday, Thursday and Friday) trading was brought to a halt and resumed after 45 minutes.

The massive sell-off at the stock market has ruined investors. The value of shares dipped to Rs6.81tr, signifying a colossal loss of Rs1.04tr in less than two months

As the World Health Organisation described the coronavirus outbreak as a pandemic for the first time last Wednesday, investors are at a high pitch of anxiety which is made worse by reports of the discovery of every new confirmed case of infection in Pakistan.

The massive sell-off at the stock market has ruined investors, many having deprived of all of their life savings. The market capitalisation of the Pakistan Stock Exchange (PSX) stood at Rs7.85 trillion on Dec 20 when the first case of the dreaded virus surfaced in China. By Friday last, the value of shares had dipped Rs6.81tr signifying loss in the colossal sum of Rs1.04tr in less than two months.

The carnage at the PSX was in sync with the meltdown in global markets where equities from Wall Street to the Middle East and Asia are witnessing heavy bleeding on fears of a coronavirus impact of a greater than expected slowdown in world economies. The market halt regulations have been in place in other bourses as well.

On Thursday, such mechanisms also went into effect in the Philippines and Thailand. Some market players disapprove the ‘’market halt’’ arguing that trading disruptions prevent price discovery and increase volatility. Chairman Policy Board of the Securities and Exchange Commission of Pakistan (SECP) Mr Khalid Mirza endorses it as a means of giving an opportunity to the run-away market to regroup and let the investors unwind themselves and start thinking rationally.

“When the rise or fall of the market is due to external factors, it is better to maintain the trading halt mechanism,” he affirmed. Mr Mirza believed that the major reason for the decline of share values at the market was that they were “overbought’’ and a correction was due.

Former chairman of the bourse Arif Habib points out that investors ignored the benefits of falling international oil prices on the economy as they were witnessing some outflow of money from treasury bills and were uncertain about the strategy of foreign investors’ going forward believing that the weakness of the rupee may force them to hold any planned fresh investments. The possible cut in interest rates by 100bps in the upcoming State Bank of Pakistan monetary statement was already priced-in.

Mr Habib said that globally, economies were suffering as consumers were avoiding big businesses to stay away from crowds. Aviation, tourism, hotels, shopping malls were all wearing a deserted look. He said that the worrying question in the minds of local investors was the eventual impact of the coronavirus on our economy. The market halt mechanism was a well-thought-out strategy which proved worthy when investors were required to be calmed in panic-like situations.

The SECP last week issued a statement detailing coronavirus contingency planning for general meetings of shareholders. In order to avoid large gathering at one place (in the annual general meetings), the companies were asked to consider several options including the provision of video link facilities at different locations in accordance with the geographical dispersal of its members.

“The directors may hold their board meetings through teleconferencing or video link provided that the minutes of such meetings are approved and signed subsequently by all the directors,” the regulator said. It is natural for investors to be worried after a confirmed case of coronavirus was detected in premises of a large conglomerate and the offices closed for three working days.

“If cases of infection are found in a production facility, would the factory be closed down, resulting in lower capacity utilisation, production and its adverse impact on company earnings?” asked a veteran stockholder.

The fear of the coronavirus is not the only reason to blame the meltdown in the equity market, but it surely is the most prominent one. The mind-boggling decline in international oil prices has hammered the heavyweight oil and gas exploration and production stocks.

Investors were ignoring the benefits of the crash in oil prices to the country’s economy. Economists calculate that on an annual basis of $20/barrel, lower oil prices would reduce Pakistan’s oil import bill by $2.5bn, which constitutes 50pc of Pakistan’s current account deficit. The benefit will travel down to lower inflation and allow monetary easing.

The new regulations also provided for an increase in circuit breaker levels (maximum permitted rise and fall in the price of a particular stock on a single day) to 7.5pc from the previous 5pc. The increase has been made gradually by 0.5pc every 15 days and has reached 7pc. The approval for the increase was given by the SECP. Musarat Jabeen, executive director and spokesperson of the SECP, says that the bar had to be raised since at 5pc the limit was considered to prevent price discovery, made exit difficult for investors and was an inefficient mode of managing price volatility.

Published in Dawn, The Business and Finance Weekly, March 16th, 2020

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