When the black swan lands

March 30, 2020


The bloodbath in the stock market, which has been going on for the last two weeks, seems to know no end.

Although there was blood splattered all over the street, both local and foreign investors believed anyone thinking it was time to buy would come to grief.

The dreaded coronavirus pandemic took its toll on the global markets, raising the spectre of a global recession. The investors’ rush to dump stocks led to as many as eight trading halts as the KSE-30 index sank five per cent within the first five minutes of trading. Since March 5, the benchmark KSE-100 index has tanked 30.8pc, which dragged down the index to touch 27,229 points, its lowest level in six years.

Some cooling was witnessed on Thursday (March 26) after the government took some positive measures to support the economy and the capital markets. A major step was the abolition of the capital value tax (CVT). Besides, the State Bank of Pakistan (SBP) cut the benchmark interest rate by 150 basis points, which was in addition to the 75bps decrease stipulated in the regular bi-monthly review a week ago.

The dreaded pandemic has taken a heavy toll on global stock markets, raising the spectre of a worldwide recession

The SBP in collaboration with the Pakistan Banks Association (PBA) announced a comprehensive relief package. Key points include the temporary relaxation in the regulatory criteria for the restructuring/rescheduling of loans until March 31, 2021. In addition, the timeline for the classification of trade bills was extended to 365 days from 180 days. To soften the impact of a steep decline in share prices, the margin call requirement of 30pc vis-à-vis banks’ financing against listed shares was significantly reduced to 10pc. Banks have also been allowed to take exposure on borrowers against the shares of their group companies. Banks have currently extended loans in excess of Rs100 billion against listed shares.

In response to the market’s major fall, the Securities and Exchange Commission of Pakistan (SECP) says it is closely monitoring the situation. SECP Executive Director Musarat Jabeen says the SECP double-checks measures through its systemic risk monitoring committee in addition to the National Clearing Company of Pakistan, which keeps track of risk management measures through its committee that has outside participants. “All margin collections are on time. There have been no settlement issues and the Securities Market division is furnished daily reports by the bourse,” Ms Jabeen says.

Arif Habib, former chairman of the bourse, acknowledged that the stimulus package for the market should be helpful. But he cautioned that investors may be prompted to put their investment decisions on hold for the time being as economic uncertainty bites.

“Many are happy to sit on cash and wait,” he said. Mr Habib would not hazard a guess about the future of stocks. “The market has no bottom, yet a return of investor confidence could stabilise it going forward,” he said.

Meanwhile, global equity markets opened on a high note for the third day in a row on March 27. Dow and S&P were up 6pc in early trade as oil traded around $23 (US crude) and $26 (Brent).

Ahmed Chinoy, an elected director on the Pakistan Stock Exchange (PSX) board, affirmed that the ability of the market to sustain in the positive territory after weeks of red could provide some confidence to investors. He observed that the package of assistance for the market would be useful, but it was nothing of the type that other countries were offering.

“The smooth settlement of rollover of April contract due on Tuesday (March 31) would have to be watched,” he said, hoping that it would pass on without an event. Mr Chinoy believed that it would be a tough task to attract investors as they were inclined to risk-free, double-digit returns that fixed income securities provided.

“Going forward, last week’s massive devaluation would throw into disarray all calculations by exporters. Export revenue may take a hit as our main trading partners along with some other countries that are reeling from the impact of the coronavirus pandemic,” Mr Chinoy observed.

The sell-off of treasury bills worth $1.6bn by foreign investors in March was a big drain on the economy and may have been a factor in pushing up the exchange rate to Rs166. Foreign investors have been major spoilers in the equity market as they have sold shares worth $124m since January 1.

The manager of a mid-sized asset management company affirmed that 90pc of his money is in equities although mutual funds were required to keep 70pc of their net assets under management in shares. He said that neither volume nor traded value betrayed a run on redemptions. “Unlike small investors who would flee on the slight sign of danger, institutional investors like the Employees Old-Age Benefit Institution, insurance companies, banks and corporate entities have a long-term horizon and are not awed by the rise and fall of the market on a short-term basis,” he said.

PSX’s former general manager Sani-e-Mehmood Khan suggested that the government and the apex regulator could help sustain the capital market upside by taking a bold initiative. “Entrust the font-line regulator with the task of ensuring the reopening of all 50,000 UIN/accounts, which were recently closed in the wake of biometric verifications and throwing all greyhounds out of the market.”

He recalled that the Indian market was rerated positively after black money was pulled out of the system, paving the way for the bourse to become a destination for international fund managers and global investors.

Taha Khan Javed, head of equities at Al Meezan Investment Management, stated that it would be a mixed bag for Pakistan’s economy. “It will result in a slowdown in economic growth owing to reduced domestic and external demand. However, a decline in the prices of commodities, especially crude oil, will help lower the trade deficit and inflation.”

Published in Dawn, The Business and Finance Weekly, March 30th, 2020