The PSX trauma

Haemorrhaging equity markets seems the new norm across the world, at least in the immediate term, as there's still no telling how much worse the coronavirus pandemic can get or just how long will it last. That, of course, has left investors as well as economists scratching their heads about the eventual financial impact of this unprecedented global crisis. And considering how all major stock markets are getting hammered, the nosedive on the Pakistan Stock Exchange, despite four trading stoppages in just about a week, does not seem all that out of place.

The market is, after all, a reflection of the real economy in many ways. It's no secret that Pakistan's economy was hardly much to write home about even before the coronavirus, arguably a true 'Black Swan', took the international financial system into unchartered territory. But now, with supply chains severely crippled and countries and markets shutting down, there is clearly more downside to contend with in the weeks, and most likely months, ahead. In just the last four weeks, this virus has snuffed a good $14 trillion from world stocks.

The global reaction so far, in addition to quarantine and isolation to limit the spread of the virus, has centred on aggressive interest rate cuts and stimulus packages to keep capital markets solvent. America's Federal Reserve, trying to find its feet after the worst single day rout in more than three decades last week, reduced interest rates to 0.25 percent; levels not seen since the Great Recession of 2008. Germany has pledged a $610 billion "bazooka" stimulus to jump-start its economy just as it slips into recession. From Malaysia to the UK, packages worth almost $250 billion have been announced in addition to easing liquidity and capital requirements for banks. And even though the right results have yet to come and markets largely continue to tank, these steps must be appreciated as appropriate in the given circumstances because things will be much worse if financial markets collapse. Pakistan's options, unfortunately, are more limited. While the State Bank of Pakistan can provide momentary breathing space to the bourse by toggling the interest rate, that too in a narrow band, there's very little money for the government to throw into the financial system as any meaningful stimulus. So the local response will be measured, at best.

Given that things will not begin to turn till there's a scientific breakthrough in treating this deadly virus, and till then the international community faces headwinds, especially economic, not seen before, it is important to take a cold, calculated stock of the situation. It is no surprise that most capital market metrics are flashing recession red alerts. The Chicago Volatility Index (VIX), which represents the market's expectation of 30-day forward looking volatility, has risen to levels not seen even in the deepest depths of the global recession a dozen years ago. The Baltic Dry Freight Index, which measures global shipping freight rates and provides a proxy for world trade, has fallen through the floor implying a sudden collapse in international commerce. Even copper, often called Dr Copper in financial markets because its production and sale implies demand for construction and manufacturing, has squeezed sharply, which reflects clear global contraction. And when the whole world is hurting there's little chance that Pakistan, a small economy in all sorts of growth and debt troubles, can do much better.

Yet there's still some silver lining on this particularly dark cloud, at least as far as PSX goes. Bad as the last few days have been, it's still been slightly better than others in the region like Indonesia, Vietnam, Malaysia, even India. And while bears would have mauled anybody overly leveraged in this environment, there's plenty of scope for the stronger market players, those who can hold positions beyond the medium-term, to engage in some profitable bottom fishing. It must be remembered, though, that while markets move in lock step with the real economy, more or less, they also react very strongly to sentiment. That is why the importance of appreciating market fundamentals, especially why there is so much blood on trading floors at the moment, and not panicking cannot possibly be stressed enough. This subtle understanding can make all the difference between waiting out the storm and going completely under.