Daily Times

I feel this article should start with an apology to Jules Verne for paraphrasing the title of his epic science fiction novel, Twenty Thousand Leagues under the Sea. After the advent of the submarine in the 20th century, the novel, today, perhaps might not appear so remarkable; however, undoubtedly, when it was originally published in 1870 it was absolute proof that man’s imagination is limitless. On a related note, Talsim Hoshruba is perhaps the most imaginative of magical realism fiction, and might even be a more exciting television serial than Game of Thrones.

Quite recently, the Pakistan Stock Exchange 100 index (PSX100) crossed 40,000 points historic benchmark, felicitated even by the chief executive of the country. Which is all very good, since conventional wisdom does concur with the view that increased interest in the domestic stock exchange is directly correlated with the economic policies being pursued by the government. And more recently, a week ago, the Forbes magazine published an article whose title claimed that Pakistan’s market beat China’s and India’s; irrespective of what that means, the India part feels good, undeniably.

Electronic media and others in tandem went euphoric over the Forbes article that asserted that Pakistan stock market’s five-year performance was 400 percent; there is no harm in gloating since Forbes is a much-read American business publication. But as is usual with media reporting, everyone stopped short at the historic performance. The very article concludes with an ominous caution that all of us in Pakistan might have overlooked: “Frontier markets are highly volatile, with one year’s big winners turning into next year’s big losers. Besides, with a big run up over the last five years, most of the gains are already behind, for now.”

But let’s ignore the warning for the moment, since it might even be a western ploy aimed at destabilising Pakistan, and continue with the celebrations and try to make sense of what this means. At the outset, to venture a guess, mostly everyone reading this article is clueless on what PSX 100 index is, what it denotes, how and why it was created, and if it crosses 40,000, what exactly does it mean. Broadly, we can make out that 100 is the number of listed companies included in the index, and points are somehow related with the value of the shares of such companies, meaning that if the value of these shares goes up, the index goes up and vice versa. Therefore, a layman cannot be faulted in assuming that if the value of these companies went up 400 percent, their profits went up 400 percent too.

Unfortunately, life is never that simple; the consolidated data of profitability increase of the PSX 100 companies over the last five years is not readily available. However, it might be logical to conclude that if profits of all the PSX 100 companies had gone up by 400 percent, Pakistan’s GDP might not be trailing around five percent. But, stockbrokers, the uncrowned gurus of the stock market, will tell you that market pricing does not work that way; investors are extremely savvy and so well-informed they can factor in future profits into current share price. This even sounds ludicrous; most of the investors can’t even read a financial statement let alone project and factor in future profits. In most cases buying stocks is an offshoot of tips emanating out of the market and reports generated by stockbrokers themselves. If we think about it, why would anybody give anyone a tip? Would it not be sensible to keep it a secret and get rich?

If the rise of the index has nothing to do with underlying profitability of the companies included therein, perhaps it is linked with growth sectors. After all, the assumption that the companies included in the PSX 100 represents the cream of the stock exchange, and by default, of the country, cannot be farfetched. Here we bang into another wall: textile companies are not doing so well due to falling exports; load shedding still continues and is the bane of most manufacturing; banks had a great run last year, which is not expected to continue this year; oil prices are down so the entire sector is reeling; and fertilizer profits are down, so is cement the only reason for the market to jump over 40,000?

Curiously, the data on sector-wise market capitalisation of the stock exchange is not readily available; in fact, a layman’s search on Google could not even establish beyond doubt the current market capitalisation of all the companies listed in the stock exchange. For the lesser mortals, market capitalisation is the sum of the share price multiplied by number of shares of each and every company listed on the stock exchange. Unreliable estimates place the market capitalisation around $72 billion, which, frighteningly, is almost equivalent to foreign national debt and liabilities of Pakistan. The implication, although the two are not directly linked, is rather worrying.

If we cannot link the robustness of the market with the profitability or the intrinsic value of the shares listed on the stock exchange, perhaps we can find a clue through the movement of foreign currency into Pakistan. Once again, good luck trying to figure out how much foreigners have invested in Pakistan Stock Exchange, and whether they increased or decreased their holdings during the last year. Except that there was negative flow since July 2016 to date in the Special Convertible Rupee Accounts as per the State Bank of Pakistan, so was Forbes right? Considering the importance of the sector one would have imagined that the related information would be out there in the open for all to see!

With this current state of secrecy surrounding our stock market, a conspiracy theorist could very easily get away with a farfetched fabrication: “The west is flush with liquidity due to quantitative easing by their central banks, and negative interest rates have spurred foreign fund managers to tap emerging and frontier markets, which explains the gains in Asian stock exchanges. Pakistan’s gain is monumental because of the size and depth of its market.”

Not that the last paragraph was less than Greek for most readers. Nonetheless, there is no harm in celebrating good news, if it is good news. Growth in stock indices is positive if such growth is based upon new businesses and increasing profitability of the real economy. Unexplained growth is speculative, which is always a bubble, and bubbles burst. Someday, perhaps through a series of articles, one might make an attempt to explain the stock market and its dark side!

Dear Readers, how many can recall Aesop’s fable, The Fox and The Crow?

The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com