Panic is a mild word for what was witnessed at the Pakistan Stock Exchange (PSX) in the last 10 days of trading.

Horror-stricken investors watched their savings go down the drain. Last week, the KSE-100 index sank by 5,393 points, representing a loss of 15pc — the highest single-week erosion recorded since the global financial crisis of 2008.

Over the 10 trading days (March 9 – 20), the benchmark index tanked by 7,552 points or 20pc — almost equal to the average yearly positive return that the PSX had provided investors with during the last 25 years. Market capitalisation has been wiped off by an incredible Rs1.17 trillion or $7.42 billion in just 10 trading sessions.

While the novel coronavirus that has rattled the global financial markets is blamed for the rout, investors complain that the market has been left to fend for itself. Despite the hullabaloo, regulators were able to avoid any systemic risk.

The benchmark index lost one-fifth of its value in the last 10 trading sessions

PSX Chairman Suleiman Mehdi affirms: All risk management measures are in place, margins were smoothly collected and there has been no default.”

That is a world of improvement over the previous market crash when too many brokers went broke and quite a few took the investors’ money and fled abroad. Poor, small investors who were robbed of their life savings still curse the CEO of brokerage Eastern Capital, Munir Ladha, who sold the clients’ shares and escaped.

Basharatullah Khan, president of the Pakistan Stockbrokers’ Association, a trade body of around 130 stockbrokers, acknowledged that the brokers’ community was fully secure owing to stringent regulations and no brokerage was believed to be on the verge of a collapse.

Last week, the Securities and Exchange Commission of Pakistan (SECP) declared that short-selling in 36 specific shares of the futures market will be subject to an uptick rule for the April 2020 contracts. “This will ensure provision of required prior notice period to the market and retain liquidity in the rollover week,” the SECP said.

The regulator also promised support to the mutual fund industry by extending the maximum period of borrowing for redemption purposes from existing 90 days to 360 days. The spokesperson for the regulator said the SECP had been maintaining close coordination with the stock exchange, clearing and depository companies and other market participants in the last couple of weeks.

Market participants have renewed their demand for a market support fund of Rs20bn that they had clamoured for in the comparatively minor crisis of May 2019. Finance Adviser Abdul Hafeez Shaikh at the time promised the money but nothing transpired.

The support fund of 2008 was financed by National Bank of Pakistan, State Bank of Pakistan, Employees’ Old-Age Benefits Institution and National Insurance Company. It was issued under the sovereign guarantee and was managed by National Investment Trust (NIT), which invested in the shares of eight government-owned enterprises listed on the stock exchange.

Syed Atif Zafar of Topline Securities said that market players were demanding that the government should intervene to halt the fall. “It will be helpful if the government revisits the market support fund,” he said. He pointed out that the fund had provided a good return to the government in 2008 even on a commercial basis. Several analysts said that these were unusual times and governments globally were reaching out to calm the financial markets.

Trading halts were triggered on as many as six days in two weeks, which rescued the market from a crash. The new circuit-breaker regulation mandates that the trading halt mechanism be triggered if market capitalisation–based KSE-30 index sinks by 5pc during a trading session and is unable to wriggle out of it in five minutes. The market is then provided a cooling period of 45 minutes, which enables brokers to collect mark-to-market margins from leveraged players to mitigate any systemic risk.

Together with the market halt mechanism, the regulator also gradually lifted the circuit-breakers to 7.5pc from earlier 5pc. The latter is now coming under increasing criticism by many market participants who believe that the daily losses to investors have multiplied owing to the steep increase from 5pc to 7.5pc.

The central bank has also drawn investors’ ire. “Nothing could have been more thoughtless than the recent monetary policy statement where a cut of minimal 75 basis points was announced,” said Ahmed Chinoy, member director at the PSX. The market anticipated a reduction of up to 300bps, he added.

For industrialists, the policy rate reduction by 75bps is eyewash, he noted, as it meant banks would be advancing loans at 16-18pc in line with the clients’ relationships with their respective lenders.

Samiullah Tariq, director of research at Arif Habib Ltd, said his brokerage firm believed that the news regarding the lockdown of major cities (Karachi and Lahore) could keep the investors’ sentiment dull. Also, foreign selling in both the equity market and debt securities might keep the local currency under stress.

However, any improvement witnessed on the macroeconomic front, with the current account deficit shrinking by 71pc in July-March along with multi-decade low international oil prices and lower inflation forecast, should bode well for the overall economy in the medium term.

Investors’ sentiments may also be boosted by the news of an economic package that can be announced shortly. Many other stock strategists mused that $1.35bn outflows from Pakistan’s bond market in the ongoing month was a cause for concern. Last week, foreign fund managers offloaded stocks worth $20 million, taking the year-to-date outflow to a staggering $113m.

On Friday, the PSX appeared to break the bear hug as the KSE-100 index managed to eke out gains of 538 points (1.78pc). But it scarcely is a sign that the stampede of foreign and local investors is over.

Published in Dawn, The Business and Finance Weekly, March 23rd, 2020