Daily Times

Stock markets are a reflection of people’s expectations, which make them inherently fickle

2016 was the annus mirabilis for Pakistan’s stock market, giving a staggering 46 percent return. This was fortunate for the government as they had installed it as a shield against almost every argument they expected against their economic performance. Unfortunately, this year had not been so lucky. From the heights of 53,000, the market has over 13,000 points (it plunged to 39,000 on October 4, 2017).

This was an economic bloodbath, and investors have been left yearning to sooth their eyes with cash. The losses are in the billions. Panic, selling and uncertainty cram the headlines in the business pages these days. But what is the panic about?

Of course, Panamagate and its deep, never ending roots, the sporadic discovery of which, time and again, makes the index jitter. Meanwhile, the masses are confused. What will become of Pakistan Stock Exchange? There have been assurances and promises but no substantial guarantees. There have been talks to form a ‘support fund’ but a meager one. What is going to happen?

History can provide us with two good examples. Readers of Business Week witnessed two paradoxical world-views in a span of twenty years. In August 1979 the front cover of the above magazine heralded “The Death of Equities”. In September 1999, the Dow Jones Industrial Average closed at 10,395, in other words the price of a major US corporations has risen twelve-fold in “just twenty years”.

There was another similar incident. Back then there were voices that called for caution. But they were, at that time, a cry in the wilderness. Nobody listened. Expectations were high. What happened then was out of the realm of the possible. A Yale University economics professor declared that US stocks had “reached what looks like a permanently high plateau”. Eight days later the world witnessed Black Thursday, then Black Monday. The Crash of 1929.

The current economic indicators are quite threatening. Reserves are down, debts are up. But it is not that the economic stability of our country was hindered by all these insidious factors just now. The indicators, with their natural fluctuation patterns with respect to our country, have been more or less the same. Nothing drastic has happened which qualifies for an existential threat to Pakistan and its economy

Both had a common characteristic; nobody saw it coming. Both events left deep scars, the pain of which was exacerbated by the realisation of the fact that financial markets are unpredictable and dependable prognosis are rare. Stock markets are a mirror of people’s expectations which make them inherently fickle.

George Soros theory of Reflexivity is of high relevance here. With a little insight from Niall Ferguson and his stem-winder book on the financial history of the world, The Ascent of Money, we can make an astute observation. “Financial markets cannot be regarded as perfectly efficient, because prices are reflections of the ignorance and biases, often irrational, of millions of investors,” says Niall Ferguson.

George Soros puts it as “not only do market participants operate with a bias but their bias can also influence the course of events. This may create the impression that markets anticipate future developments accurately, but the fact is the present expectations aren’t shaped by future events, future events are shaped by present expectations”. Here, the writer again takes the lead and concludes “this feedback effect wherein investors’ biases affect market outcomes, which in turn change investors’ biases, which again affect market outcomes”, is what Soros has termed as reflexivity. We have seen a practical example of the above many times. Most recently, the Panama verdict.

Thus, many of the bears on a selling-spree might not be fully aware of their reason to sell. Why not hook ourselves to the plummeting bandwagon and save money?

No one can trace the exact direction of the stock market. However, there can be an educated-guess. An effort to investigate various factors that may be vital in deciding its future course. The economic indicators are quite threatening. Reserves are down, debts are up. But it is not that the economic stability of our country was hindered by all these insidious factors just now. The indicators, with their natural fluctuation patterns with respect to our country, have been more or less the same. Nothing drastic has happened which qualifies for an existential threat to Pakistan and its economy. As mentioned earlier, the reason is political instability which has acted as fuel to the fire, blowing the smoke of uncertainty into the economic realm and causing financial asphyxiation.

What should be done? Here is an expert opinion. Mir Mohammad Ali Khan, an investment banker, economic analyst, chairman of an advisory company and above all, an optimist, has the following to say about the Pakistan Stock Exchange (PSX): “We need immediate controls over loans and we need to promote our exports.

The government should announce reduction in capital gains tax and the world will witness our markets bounce back like no other market has done in the past. CGT reduction will put fuel in the burner. Plus political leaders need to stop coming on TV and saying that this drop in the market is due to the ouster of Nawaz. It creates an atmosphere of uncertainty.”

The future of the country looks bright. Whatever is happening should best be considered a much needed purge. The future has China Pakistan Economic Corridor (CPEC) in store. With all the claims from protectionists this very initiative (if regulated and implemented properly, the recent news that most of the boom from infrastructure development in CPEC is being surpassed from Pakistani banks, as China funds the majority, is something to be considered) has the prowess and potential to give a head-start that Pakistan has been looking for. Anyone who can only see the demise of our local industry and threat to our domestic production through CPEC, suffers from a purblind view. Matters can be handled in a way that there is a win-win situation. With such a huge project in sight and a political quasi-purge going on. There is every reason to think that yes, PSX will re-bound. Will it cross 53,000 mark? Why not? Wait for it.

The writer is a student of International Relations with interest in International Political Economy. He can be reached at osamarizvi10@hotmail.com