EDITORIAL: That PSX (Pakistan Stock Exchange) is on a roller coaster ride is a fact. The way the market moved up in the last few months it was natural that it would go in a correction mode, and even with this correction on Thursday’s close the fiscal year-to-date return is still higher than 50 percent. Some commentators (mainly political) are reading too much into these short-term market movement.
The story is, however, simplem so to speak. The stock market finally performed in the last few months after a lull of seven years. The valuations were dirt cheap, and it was bound to happen. There was no economic turnaround story to explain the 60 percent uptick in five months, and there is no economic crisis in making to explain a correction of a few percentage points from its peak.
The stock market does reflect the underlying sentiment about the economy – but the relationship is not a one-to-one phenomenon. It’s a complex relationship and markets have their own triggers to move up and down. In a country like Pakistan, where many vibrant segments are not listed (such as retail and wholesale) and within the listed sectors, some have very limited free float (such as FMGCs and textiles); this coupled with a small investor base, drawing conclusions that make headlines on the economic health of the country based on short-term movements of KSE100 index is simply a pretty naive approach to economy.
The brokers who are now all in ‘Tezi’ (bullish) had recently upgraded the valuations and were attracting new investment are now defending the correction. They are arguing that the market was too leveraged and that is causing the fall. Well, when the market moves up sharply, it’s natural for the leveraged position to be high in PKR with the unchanged holding of stocks.
Thus, overall leverage moving up from Rs20-25 billion to Rs40 billion is partly due to stock prices moving up, and partly due to fresh positions, as the MTS (badla) rate has moved from KIBOR plus 3-4 percent (24-25%) to over KIBOR plus 8-10 percent. With such a high rate, a single day correction is enough to lower some leverage positions.
One must not, therefore, lose sight of the fact that there is always some trigger that swings the market mood. The market started moving up in the last few months with an expectation of interest rates to come down as inflation perhaps peaked. The general perception was building that the economy has perhaps bottomed out, and market participants started thinking about the cheap valuation.
The market went overboard in terms of expectations of a fall in interest rates and overall economic recovery. Now the reality is sinking in that the interest rates perhaps will come down but not at a pace, which was propagated by some players.
One cannot rule out the political trigger – as of late, uncertainty about the elections has started growing. People are questioning the credibility of the election process as one particular political party perhaps is being denied a level playing field.
That creates doubts about the legitimacy of the elections and ability of the next government on-boarding a tough IMF programme.
This is one reason for recent corrections. However, these risks are not new –- and are definitely priced in. In fact, the economic challenges of the new IMF programme and the consequent low growth period (going forward) are also priced in.
The market did rally 60 percent knowing all that as the fundamental reason was low valuation. But moving 60 percent up in five months was way too much; so it is correcting, it may well have another rally if it has some positive trigger.
Copyright Business Recorder, 2023
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