EDITORIAL: Karachi stock market index crossed the 54,000 level this Monday (7 November 2023), the highest ever level in the country’s history with total market capitalisation increasing by 94 billion rupees. This was on the back of aggressive buying by local investors with institutional support. Disturbingly, history reveals that the Pakistani bourse is extremely susceptible to manipulation due to a small number of key players.
Additionally, if one considers the fact that successive Pakistani administrations in general and finance ministers in particular have cited a bullish trend in the stock market as indicative of the trust reposed by the market in their policies, the likelihood of state complicity rears its ugly head. And finance ministers have manipulated the market through the threat of higher taxes, and in this context it is relevant to note that the Pakistan stock market generates no more than four to five billion rupees in annual tax revenue while the Indian bourse generates more than 100 billion.
To claim that a bullish stock market reflects well on the general public is not supported by facts – not in Western economies, including the United States and not in Pakistan. Senator Elizabeth Warren has repeatedly argued that rising share prices do not reflect general well-being as those who buy shares are not the poor or the low income earners. In her remarks on share buybacks Warren argued that this is merely market manipulation to inflate executive pay as “they got a little fluff-and-buff in their stock.
And how did they do that? By taking their excess cash and saying, ‘Geez, we can’t figure out anything to do with this cash. We’re not going to give it back to our investors. We’re going to make the investment decision that the only investment in America that makes any sense is to buy back our own stock.” She added that stock repurchases neither improve the quality of the business or the goods/services produced.
In Pakistan, there is a much smaller percentage of players on the stock market with the poor and the majority of lower to middle income earners not even aware of the existence of this market.
Research carried out both domestically and internationally reveals that while the Pakistani and Indian bourses operate under somewhat similar rules yet, as per Uppal and Mangla, India’s principal regulator of stock exchange, the Securities and Exchange Board of India (SEBI), was more successful in achieving the objective of curtailing manipulative and speculative behaviour relative to the Securities and Exchange Commission of Pakistan (SECP) – perhaps due to stronger competitive environment in India because of the existence of multiple organised exchanges relative to Pakistan.
Foreign portfolio investment, particularly susceptible to outflows at a moment’s notice that Malaysia’s Mahathir Muhammad claimed was the root cause of the 1997 Asian financial crisis, was negative 30.1 million dollars July-September 2022-23 against plus 9.7 million dollars in the comparable period of this year; however, on Monday, foreign investors were net sellers of shares amounting to 777,366 dollars.
To conclude, the stock market and the economy is not aligned in Pakistan. Findings in a research article by Husain and Tariq Mahmood suggest that “a disturbing feature of Pakistan’s stock market is that it cannot be characterised as a leading indicator of economic activity and in the absence of other strong indicators shooting up stock prices may indicate a speculative bubble”.
Copyright Business Recorder, 2023
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