Daily Times

Ever since the spectre of Panama papers was let loose, the Pakistan Stock Exchange has been the subject of so much volatility and fluctuation as to induce a permanent state of vertigo for those riding on the undulating waves. First it was political uncertainty that lapsed for almost more than a year.

As the political soap opera came to its end, the monster of economic default began to raise its head behind the wall and instead of shooting it between the eyes the gatekeepers distracted by noise and hysteria gave the monster time to take shape and consolidate.

Now even as General Elections were held peacefully and on time, one of the greatest concerns weighing down on the index, and the new government settled down, however, we still haven’t seen any significant improvement in the performance of Pakistan Stock Exchange. Why?

The prime reason remains the country’s economic condition. Foreign exchange reserves are alarmingly low; barely sufficient to cover two months of imports. There is a balance of payment crisis. The current government is jostling with different options.

They want to boost up the collective national morale by not going to IMF, however, that seems difficult to avoid. Our friend from the East, China, has helped us by inoculating some dollars into the system. Sheikhs from Saudi Arabia have also pledged to provide with largesse of $4.5 bn but only to be used for oil payments. It is estimated we need $12 bn to avoid a bailout. However, the option to turn towards a lender is the last resort.

This has helped to kindle the smoldering heap of uncertainty and investors are on a wait and see mode.

Another factor is Pakistan’s inclusion in FATF. It is a lingering one, like the one mentioned above. When Pakistan was included in the Grey list by Financial Action Task Force the sentiment took a negative turn. Such events tarnish the image of the country serving as a warning sign to foreign investors who take it as symptomatic of the future issues. Who wants to risk it, when the chance of loss surmounts to that of the profit.

It should also be noted that foreign investors have the second highest number of holdings in PSX after institutions like mutual funds and banks etcetera. All of us have to wait for September 2019, when our status will be subject to revision

It should also be noted that foreign investors have the second highest number of holdings in PSX after institutions like mutual funds and banks etcetera. All of us have to wait for September 2019, when our status will be subject to revision.

“Bears dominating the market irrespective of the fact that elections went well, but for now investors are looking forward to what the newly elected government has to serve them with their policies or for that matter how are they going to deal with ongoing macro-economic issues: Circular debt, IMF bailout package, depleting foreign reserves, ballooning external deficits! Says Nadir Khalid who has been dabbling in Stock Market for more than 9 years.

He further adds that “Investors and institutes waiting on government’s decisions regarding further monetary tightening, rupee depreciation, tariff hikes and spending cuts. As of now there is no direction for the market. Sector wise policies will determine their future, for instance, a 46 percent hike in gas tariff dented the Cement and Fertilizer sectors which dragged the index down.”

One of the most important reason, is the lack of any nudge. As, “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 in his book Ascent of Money, so to change the ignorance and biases of investors we need a nudge.

Then there is what George Soros has interpreted the financial theory of Reflexivity, which further stresses upon the importance of sentiments and feedback: “this feedback effect wherein investors’ biases affect market outcomes, which in turn change investors’ biases, which again affect market outcomes”.

Hence, what we need is a nudge. It can take many forms. For example, even the slightest sign of a solution regarding our balance of payment crisis would do the job. Any report or update acknowledging our efforts to curb terror financing and antimony laundering (CTM/AML) by FATF will easily qualify for a strong nudge.

But then there is a very significant inquiry concerning growth – was it natural or artificial? Our index jumped from 31,000 to 53,000 in a matter of a year or so. What were the displacements? GDP growth and the induction of Pakistan in MSCI emerging market index were the main drivers.

Pakistan’s GDP grew by 4.67 percent in 2015, to 5.79 percent in 2017. But then Panamagate happened. And the stocks tumbled from 53, 000 points injuring many investors – especially the short term ones.

Until or unless the government delineates the future economic policies, the issue of IMF and bailout resolves and our future vis a vis the FATF becomes clear, we might have to wait to see the an improvement.

The writer is a freelance columnist. He can be reached at osamarizvi10@hotmail.com

Published in Daily Times, October 9^th 2018.