Daily Times

Strong fundamentals, investors’ exuberance and politico- economic triggers drove Pakistan stock market to witness record volumes in nearly 15 years and cross 42,000 mark in September. However, as the benchmark index Kse-100 is headed towards achieving new milestones, the threat of a Minsky moment looms large.

Pakistan’s stock market witnessed a rocky ground ever since the Covid-19 pandemic spread across the world, which has killed nearly 0.87 million people and infected over 26 million people across the world, according to the data compiled by Johns Hopkins University. Amidst, the initial peak, Covid-19 pandemic sent nearly half of world’s population in some form of lockdown, halting economic activity which sent shockwaves across the global stock markets- sending them crashing down. Pakistan Stock Exchange (PSX) also became part of the domino effect, and crashed to touch its lowest index level for the year 2020, at 27,228.80, on April 25th.

The index, however, has nearly recovered all of its losses incurred due to Covid-19 and its concomitant economic implications. The recent rally and Bull-run recorded at the market not just defied pundits’ projections, but also posted one of the best returns across the global markets. Adding more achievements to its chest, the index also managed to make headlines across the world, after it was tagged the best performer in Asia and the fourth-best-performing stock market in the world by according to the report by New York-based global markets research firm,marketcurrentswealthnet.com, titled Denmark and Pakistan: the surprising stock markets that outperformed in 2020. According to the report “PSX benchmark KSE-100 index has given a return on investment of 38.5% in dollar terms as foreign capital has been flowing into the market after the yield on the nation’s bond fell below double digits,”.

The recovery and boom, however, threatens the market to fall for a “Minsky moment,” which is named after economist Hyman Minsky, and refers to a sudden market collapse following an unsustainable bull run, which in this case could be fueled by the easy credit environment created as a result of unprecedented fiscal and monetary stimulus measures- in line with lack of political noise.

The triggers which allowed bulls to return to the market were led by series of macro fiscal and monetary policy decisions. Pakistan’s central bank’s move to slash interest led the trigger point, when it cut its policy rate to 7%, down from 625 basis points from a rate of 13.25%. Moreover, Government of Pakistan’s Rs1.2-trillion economic relief package to shield the economy from adverse effects of the coronavirus pandemic, also bolstered investor sentiment and encouraged them to make fresh investment. Among other series of triggers, International Monetary Fund’s emergency loan of $1.4 billion for Pakistan under its Rapid Financing Instrument and Government’s passage of budget for fiscal year 2020-21 also played an important role in lifting market sentiments.

However, the triggers may not prove to be sustainable for near future course considering the volatile nature of the risk asset market. The near complete reversal of Covid-19 losses strongly hints towards a Minsky Moment which may be triggered combined by high valuations of stocks, recent economic cost of flash floods and rising political noise, which are strong indicators of market looking for pockets of correction.

But, market analysts and experts still think that the index is headed for a long term bull, and short hiccups should not be inimical for the future course. Muzzammil Aslam, CEO, Tangent Capital Advisors (Private) Limited said, “PSX is back it to Pre-covid level and still 20% down from its peak of 2017. Some shares from oil & banking sector are even 50% down from peak. Market still have room for improvement and it’s hedged with future macro outlook.” He further illustrated, that the market correction is always a possibility but the near future tank is unforeseen, unless political instability or re-emergence of covid-19 rattles the sentiments.

While, investors may continue to build up on strong fundamentals and realization of previous triggers, Market expert and Executive Director, at Alfalah, CLSA Syed Rehan Ali said, fundamentals and markets do not have a one on one relationship, in fact it is dynamic, and therefore whatever the fundamentals depicts do not reflect upon the markets, since markets are forward looking and move ahead of time. Considering, recent trend at the market and record volumes, Rehan said the current trend of strong volumes and rise in the Index will continue to be witnessed till the first quarter of the next calendar year. He said, in a significant move in recent weeks, market has penetrated and moved above the long time bearish term, and with sustaining volumes the market index may hover around 43,400 mark in the short run, and in the long term the market may probably hit 47,000 index level.

Since the index continues to mushroom with record returns, heavy volumes have been led by individuals and mutual funds, with investors responding to every positive trigger even before its realization. Irfan Saeed, Senior vice president BMA Capital management Limited, said the market has entered an overbought territory in the short term, and since the recent record volumes are primarily witnessed in penny stocks, it indicates market is looking towards consolidation or slight correction. However, Mr Saeed said, investors should look for an opportunity to buy during an event of correction, as market is headed towards its record peak. Mr Saeed said investors have matured, and have shrugged off recent events of flash floods and political noise, but an economic package by the federal government to address Karachi’s submerged economy may prove to be another trigger point. Mr Saeed also added, investors should closely follow State Bank of Pakistan’s Monetary Policy Comm-ittee meeting in September, and any change in interest rate which will guide the future course of market sentiments.

The market experts may indicate towards a strong momentum at PSX, shrugging off any event of sudden collapse, but as risk assets become increasingly volatile across the globe, investors should gear up for any possibility.