At the stock market these days, a drama unfolds. The story is quite familiar: a love affair has gone sour and the distraught lover is demanding special treatment. The distraught lover is obviously the stock market players who are demanding a bailout package and other fiscal incentives from the government. The government’s response so-far is muted. Whatever may be the government’s reasons, it’s rightly so because capitalism is a two-way street, a lesson the punters are yet to learn.
For investors at the PSX, the likely win of PML-N in elections 2013 was love at first sight. By April 2013, they were blinded. Such was the intensity of gooey optimism that in its hangover they even failed to see the writing on the wall that grew prominent after the April-2017 court decision to form a JIT against the then sitting PM. Instead, they jacked up the benchmark index to record high (52876 points) ‘WHILE’ a JIT was investigating the then sitting PM. Unimaginable!
It’s not as if they weren’t cautioned back then. Back when the market was flirting with highs, this column cautioned not to fall prey to the ‘bullish bias’, and that it will not be a surprise if the index slips to 39000 points (or even 36000 points) in the days ahead. Yet, now the market has the audacity to demand special favours when it was their own foolhardiness that got their fingers burned. (See BR Research columns: ‘The PSX bloodbath’, Jun 14; ‘Is it the ‘end of uncertainty’ at the PSX?’ Aug 1; ‘Time for statues at the PSX’, Aug 24; and ‘Camel at the PSX’ Sep 7, 2017).
There is no use naming and shaming but readers are encouraged to peruse brokerage house dailies that literally cried bull on something as weak as month-on-month improvement in current account, when contrarians continued to caution about political headwinds.
Anyway, running parallel is another interesting side story: the hopes of getting high foreign portfolio inflows following Pakistan’s inclusion in the MSCI Emerging Market Index. The victims in that story are the people who invested in mutual funds - the funds who bought $96 million worth of stakes during a rising market between Apr-20 and May-24.
There were two villains to this side story. The first is the myth repeatedly told that inflows after the inclusion in MSCI EM index would be higher than the outflows following the exclusion from MSCI FM index.
The second is the international brokers, who had taken positions on their prop books in anticipation of the EM inclusion, and sold off those positions in off market trade to EM fund managers as soon as Pakistan beeped on their investment radars. That hurt the local mutual fund industry, and might hurt more until the funds shed the excess positions they took.
Back to the main drama! On October 31, KSE-100 closed at 39617, its lowest close since September 5,2016. Since then the market has bounced back 800 plus points. But as the drama unfolds, the question on everyone’s mind is about the direction the story will take. BR Research is surely not writing this drama, but from the looks of it, this is how it might unfold.
The market will try to jack up the index every now so often, sometimes on what is fondly called ‘attractive valuations’; other times it may be month-on-month improvements in a few macroeconomic indicators. But every time it does that force far greater – the political headwinds and a brewing external account crisis – will push back the index.
In so far as the external account is concerned, the PML-N is only pushing the can down the road, when – short of a miracle – the road itself is heading towards the IMF. There is only so much an inflow of $2 billion from selling Eurobond or Sukuk can do when the country has lost $2.4 billion reserves in the last four months.
Despite that the PML-N will still not go to the IMF in the run-up to the elections because that will be a political disaster. Which means it will continue pushing the can, and doing patchwork economics with a finance minister whose attention is diverted to the courts. Meanwhile, the final NAB judgment may take until February 2018 or even perhaps March, and in between there may be many slips between the cup and the lip.
What does this mean for the market? Since its peak in late May 2017, the index had been witnessing lower highs and falling bottoms. On October 31, the index stalled the falling bottom trend (on intra-day low basis). This is an early sign of a support; validated by the fact that index finds it hard to dive below the 500-day moving average.
In its entire recorded history, the KSE100 has dived below its 500-dma a few times. There were some persistently bad periods in late 90s and from early 2001 to early 2002 – those early Musharraf days. Outside of that, there was only one episode: the 2008-crash and what followed the removal of the then wrongly imposed floor. Aside from these periods, the 500-dma support is hardly ever breached, and if so, then for no more than few days.
While that should provide a strong support, consider also that some political observers term the ongoing saga in Islamabad as the return of the 90s. Whether that view is correct or not is a different matter, it is enough to irritate sentiments.
Now consider that the 10-year PIB secondary market yields have begun to rise. And they are set to rise further as interest rates by most estimates have bottomed out. For anyone who has tracked the wrath of yields, that should spell bane for the market.
All things considered therefore, the optimistic scenario until NAB’s final decision seems to be a range bound bear-dominated behaviour with short-lived upward spikes due to momentary lapse of reason. Equally possible scenario – should political situation worsen or if interest rates are raised sharply - is an eventual correction until 36000 points. That will turn this drama into a memorable epic.
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