Covid has turned the tables in the international financial markets. The liquidity pumped into the system is unprecedented and markets across the globe are manifesting the craze derived from the excess liquidity. Pakistan is no exception in terms of liquidity – higher home remittances, SBP temporary refinance schemes, government direct and indirect injections, all are pumping liquidity into the market.
With this backdrop, the pundits at the PSX say that the domestic liquidity shortage is making the market go south. There was a bloodbath yesterday, as the KSE-100 tanked 5.3 percent from its recent peak on Feb 3, 2021. Ironically, the liquidity in the foreign exchange market is strengthening the currency, up by 2.6 percent in March.
The issue is that the liquidity pumped in is not really coming into the stock market. The money supply (from Mar20 to Mar21) increased by 17.4 percent – highest increase since FY07. The liquidity is going somewhere else, but not much into the stock market – and within PSX, it is going into blue-eyed scrips, not blue-chip stocks.
First try to see how big the stock market is in Pakistan. The money supply stock is Rs22 trillion – within it Rs16 trillion are bank deposits and Rs6 trillion is currency in circulation. Over Rs4 trillion are in the NSS and no one has any clue how much is parked in real estate and cash foreign currency (FE official accounts are at $7.8 bn i.e.Rs 1.2 trillion).
The capitalization of stock market is at Rs8 trillion – 28.5 percent is free float i.e., Rs2.3 trillion. It is too small a number in the bigger scheme of things.
The interest of big banks, mutual funds and others are more into the risk-free assets - mainly government bonds and papers. The size of mutual fund industry has almost doubled in the last two years; but besides NAV appreciation, nothing has jacked up equity funds as such. Most of the inflows are in the money market and fixed income funds. Banks have loads of liquidity; but their love affair with PIBs and T-Bills continues to ignore the stock market.
Banks have made a record portfolio in PIBs but are not ready to invest in the equity market. Single-digit return in T-Bills seem to be more lucrative than mouthwatering double digits dividend yields in a few fundamentally strong segments.
The real problem is lack of returns in the blue-chip companies. The heavy weight energy sector is chocked by the circular debt. That is keeping investors at bay from E&P and others. However, banks and fertilizer are fundamentally strong, but these are like the Evergreen ship, not easy to move. Tugboats are missing i.e., liquidity to move these stocks.
Mutual funds are almost fully invested. Banks are giving excuses of stringent capital adequacy requirement – their sponsors are becoming too risk averse. Same is the case with DFIs and even microfinance banks. Foreign selling is not ending. It is retailers who are pumping the blood and some big individuals (alias Muna Bhai and company) are probably playing the pumping and dumping game.
It is for the SECP to see if there is any truth in this pumping and dumping. The fact of the matter is that Muna Bhai and company are driving the retail craze. Small stocks, just like small ships, are easy to move. It is easier to build them and to sell the story. That creates momentum, and once the returns are seen, the retailers come and attack like honeybees.
The savvy investors get frustrated by not receiving any return in the blue-chip stocks and marginal investor keeps on moving to blue-eyed stocks of Muna Bhai and company. This triggers the rally in small stocks further.
The question is not about the liquidity, but the quality of liquidity. The market is not homogenous. The casino house game is going on. Stories are selling – be it mirroring of global tech stocks to local, or any others. The story only sells in scrips that can move (or maneuver) easily.
That is the story of PSX for last one year. Yesterday’s fall is based on several news. Delay in IPPs payment, fate of newly proposed refinery policy, redemption in mutual funds by a big player, and increasing Covid cases.
Many are of the view that this fall is purely a liquidity issue. It is in overbought range in blue-eyed stocks and no liquidity in blue-chip stocks. Some correction will bring fresh liquidity into both type of stocks, as there is no bad news in blue-chip stocks, while we all know the muscle of
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