“THE moving finger writes; and having writ, moves on: nor all thy piety nor wit shall lure it back to cancel half a line, nor all thy tears wash out a word of it,” are some of the best lines written by the Persian poet, Omar Khayyam.
Covid-19 took the familiar path of all great tragedies: denial, anger, grief and finally the recognition that the world has changed. “Covid-19 is a reality,” says Arif Habib, former chairman of the Pakistan Stock Exchange (PSX). Since February when the first case of Covid-19 was discovered in Pakistan, all the forecasts prepared by the best brains in the market have turned on their heads. “This year was expected to be a year of economic resurgence after almost three years of economic turbulence,” said an investment strategist.
Early in March, nervous investors continued to dump shares and switched to the dollar that saw the KSE-100 index sink to its lowest level (until then) of 35,956.69 point. But that was just the beginning. The index is now range-bound with quick movements in and out of the 30,000-point mark. As the number of infected people surges in the country, investors have their eyes set on temperature readings instead of the trading board.
“The progress of the disease has the potential to determine the direction of the stock market,” said Mr Habib while avoiding making a wild guess on how the market would fare going forward. He was, however, greatly encouraged by the compassionate view taken by the international financial institutions in lending a helping hand to Pakistan in these times.
‘The stock market is expected to rise with the potential upside of 20-25pc,’ says Dr Amjad Waheed, CEO of NBP Nafa Funds
Mr Habib was particularly enthused by the inclusion of Pakistan in the group of countries eligible for debt relief on all principal and interest payments to official bilateral creditors announced by G20. The estimated benefit to Pakistan would accrue to the tune of $12 billion. This follows the announcements about the expected disbursements from multinational institutions, including $1.4bn from the IMF, $1bn from the World Bank and $800m along with relief aggregating $12bn from the IMF, Paris Club and other bilateral creditors.
The valuation of stocks depends on the performance of the underlying companies they represent. Ahmed Chinoy, an elected director of the PSX, conceded that the lockdown to contain the pandemic outbreak was a sane measure. He contended that the lifting of the lockdown from the construction sector would have a limited effect since auxiliary services like labour and transport and supplies of concrete, cement and steel were not available.
Commenting on how the industries would fare in the foreseeable future, Mr Chinoy said, “The writing is on the wall.” The loss of production and financial losses sustained in the three months of the turmoil (March-May) would eat into the profitability of the remaining nine months of the year, he reckoned.
Excited by the reduction in the key interest rate by two percentage points to 9pc by the State Bank of Pakistan (SBP) on Thursday, NBP Funds CEO Dr Amjad Waheed asked his finance director to suggest/advise clients to switch from money market/income funds — if they are comfortable with the stock risk — to Sarmaya Izafa and stock funds. “The market is expected to rise (from Friday) with the potential upside by 20-25pc,” he predicted.
Another incorrigible optimist also thought that the time was ripe to enter stocks. “The SBP’s surprise discount rate reduction by two percentage points on top of 2.25 percentage points in a short span of one month completely changes the scenario,” he said. It comes on top of earlier major incentives granted by the government and the SBP. The downside risk in the market was thought to be limited.
“All big companies have got deferred loan payments with improved liquidity; oil, coal, LNG, LPG have all dipped to hit the pit; the rupee-dollar parity can improve in favour of Pakistan as the deferred external loans and the IMF package will help the country improve its current account balance,” he observed.
But some other pragmatists asked the enthusiasts to hold their horses. Faisal Shaji, investment strategist at Standard Capital, said on Thursday the stock market might not see a major upside regardless of the interest rate cut. He argued that it would take a couple of months for manufacturing facilities to begin normal operations. “Some denim exporters in Karachi have kept their factories shut and laid off workers. This makes the situation grim for the coming few months at least,” he said. He added that since the United States, which is Pakistan’s biggest export partner, is engulfed in a worst kind of recession, it would inevitably hurt major exporters in the foreseeable future.
Analysts pointed out that the January-March quarter reporting season is around the corner. Most of them expect heavyweight sectors like energy exploration and production, banking and fertiliser to unveil positive earnings growth with little hope for numbers from cyclical sectors like cement and steel. However, the results are not likely to be of much interest to investors who can clearly see the profitability across sectors wane in upcoming quarters.
Published in Dawn, The Business and Finance Weekly, April 20th, 2020