What caused the Pakistan Stock Exchange boom and bust?

[Musafir123]

When the Pakistan Stock Exchange provided returns of a stunning 46pc in 2016 — the highest returns on equity investments by any market across Asia — market participants and regulators moved about puffing their chest.


Brokers and analysts projected the Index would hit 56,000 points by Dec 2017, up another 8,300 points from Jan 1.


Good times continued to roll for the PSX well into 2017. On May 25, the benchmark KSE-100 index hit an intra-day all-time high at 53,124 points — upside of 11pc from Jan 1.

The rise and fall of the PSX has generated quite a lot of controversy. Who parented the stock market upheaval?

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That marked the peak from which the index came crashing down. In just 16 trading sessions until last Friday, the Index has lost 6,265 points, representing an incredibly steep fall of 12pc.


The rise and fall of the PSX has generated quite a lot of controversy. Who parented the stock market boom and bust?


The boom


Incontrovertibly PSX stocks rose on the back of excitement created ahead of Pakistan’s reclassification into an MSCI Emerging market, from a Frontier Market. The inclusion was to be on June 1.


“We can expect a flow of between $300 million from passive investors/index funds over the next few days,” said Farid Khan, CEO of HBL Asset Management. And he was not alone in such a prognosis.


Estimates varied, but there was almost not a single person who had anything to do with stocks and the market went on record refuting the belief that the expected inflows were for real.


Even the PSX management made preparations and announced extra-time sessions to accommodate the heavy increase in activity on May 31 and June 01.


But as the trading drew to an end on March 31, investors were stunned to see net outflows of $81.7m. So what went wrong?


Scores of delegations of big brokerages, mutual funds, major listed companies and officials of PSX had trotted the globe, from Wall Street to Hong Kong, before June 01 to gauge the interest of MSCI passive funds in Pakistan.


It was on such feedback that every single person was enthusiastic over foreign inflows on the eve of Pakistan regrouping as an Emerging Market (EM).


No one had foreseen that Frontier Market Funds, which retain heavy investment of around $7 billion in the PSX, would go on a selling spree.


Topline Securities argued at the time, “Though Wednesday’s gross buying activity of $452m was in line with our expectations, it was overwhelmed by gross selling of $534m”.


That left the net foreign investment in negative by $81.7m. The benchmark KSE-100 index succumbed to a record single-day decline of 1,811 points, or 3.58 per cent.


Six companies had qualified for the main MSCI EM index: Engro Corporation, Habib Bank, Lucky Cement, MCB Bank, Oil and Gas Development Company and United Bank. EM passive funds were supposed to target those six.


In anticipation local market participants — mutual funds, banks, companies, stockbrokers and individuals began to build up positions.


They took the cue from the reaction seen in the Dubai and Qatar equity markets, which had received buy orders of $469m and $160m between the MSCI inclusion announcement on June 11, 2013 and the actual inclusion on June 1, 2014.


The bust


Local participants who had accumulated the six heavyweight stocks in anticipation of selling them to foreign funds at a higher price had carried market prices to unsustainable levels.


On May 25 at the height of the bull run, UBL stock was priced at Rs260; HBL at Rs305; Lucky Cement Rs962; OGDC Rs187; MCB at Rs247 and Engro Corporation at Rs399 a share.


As panic gripped the market on the complete lack of interest shown by EM Funds, local investors started to unwind their positions. In the process, the six stocks have seen a major rout.


By the close of trading on last Friday, UBL stock price had dropped to Rs222; HBL to Rs260; Lucky Cement to Rs826; OGDC to Rs141; MCB to Rs208 and Engro Corporation to Rs335.


Due to their heavy weightage of as much as 70pc in the KSE-100 index, they dragged the entire market down.


From its intra-day all-time high of 53,124 points on May 25, the KSE-100 index at the last closing last Friday plunged 6,265 points or 11.79pc. Stockbrokers who had accumulated mainly the six big shares but failed to sell-off on time were left holding the dirty end of stick.


Nasim Beg, vice chairman, Arif Habib Savings believes that brokers could influence the market in the past when there was ‘leverage’ trading, but no more. Another fund manager said that the international brokerage, Goldman Sachs, told them in informal chat that their clients required them to provide inventory from anticipatory buying.


Most market participants and even individual investors who were keeping to the sidelines said that political upheaval does cause fear in the minds of a change in government and inconsistency in economic policies.


But whether the present government stays or falls, the irrefutable fact is that everyone knows that stock markets all over the world hate uncertainty. There goes an adage: “For the market, uncertainty is worst than bad news”.


Published in Dawn, The Business and Finance Weekly, June 19th, 2017

 

[arafay]

kyun udaas bethe ho Ramzan ki shamo mein
is tarhan to hota ha is tarhan ke kamo mein

Pakistan stock exchange is pure satta/betting fueled by speculation and inside trading. i was also told by some 'experts' to buy stock before May 31 - the deadline after which PSA was supposed to enter MSCI. fortunately I used my brains and did not enter the market which is heavily over priced even after correction of 10%

 

[jaanmark]

hAng them all who has cause to deaths in Pakistan

 

[Sohail Shuja]

kyun udaas bethe ho Ramzan ki shamo mein
is tarhan to hota ha is tarhan ke kamo mein

Pakistan stock exchange is pure satta/betting fueled by speculation and inside trading. i was also told by some 'experts' to buy stock before May 31 - the deadline after which PSA was supposed to enter MSCI. fortunately I used my brains and did not enter the market which is heavily over priced even after correction of 10%

You did the right thing. The major forerunners of the stock exchange were the banks (UBL, HBL, MCB) and very less was contributed by industries that add to the real GDP, i.e. the manufacturing sector. The evaluations of banking and insurance sectors are always dodgy, as their progress heavily relies on the performance of the industry to whom they give loans and get a return in time. So if your industry is not working, these stocks are destined to doom at one point.

Furthermore, the inconsistent policies of government had also been a real thorn twisting in the sides of these banks. Say, e.g. Ishaq Dar levied a tax of 0.6% on every transaction of 50K or more. Even some banks started to charge that amount for transactions greater than 50K. Now if I apply for a loan over than 50K, then obviously, the bank has to deduct that 0.6% of this amount while dispatching the loan. It is an additional 0.6%.

But wait, this is not all, when I will return the loan and if my transaction of the annuity is greater than 50K, this 0.6% is deducted again on that transaction. So, in effect, the government is deducting 0.12% on the loans on the shortest chain of a normal business cycle.

This exceptionally raises the cost of the capital to do business in Pakistan and magnanimously cuts the profit margin of the banks. It becomes a vicious cycle... lets see .. bank makes a transaction in my account i.e 0.6% deducted... then I moved that amount to one of my suppliers/vendor account etc.. that is addition of 0.6% deducted there, then I get the payment from my client -- again 0.6% deducted, then I make the payment back to the bank where I have to get this 0.6% deducted again. Moreover, when I will withdraw my profits in excess of 50K, then I will again pay a sum of 0.6% on that transaction. This is tremendously insane. The truth is that with every transaction... this sum will keep adding to the original costs of business, for no proper understandable reason. It is the classical case of Dar-o-Nomics at work to destroy not only the business of the financial institutions, but also the dependent sectors as well, where a transaction through bank is inevitable.

Additionally, since the overall economy of Pakistan is incurring losses and the budget deficit keeps on expanding, people tend to smell uncertainty in the future, no matter how fast your private or public sector is progressing. The Government expenditures have to be controlled, or they know that in order to meet the deficit, the government will start increasing taxes and duties.

So when someone asked me for a correction factor of PSX, I told him to keep it at least 24%. When we did the maths, it never was feasible. The boom was only temporary, when some of the investors moved their investments from UAE, Saudia and Qatar, due to this oil slump. Perhaps they were expecting the growth of the industrial sector in purview of CPEC related activities. But that too proved to be a super inflated balloon. Now all the air is out of it.

Think of Government policies of installing power plants which are to be run on imported coal and LNG. It means a constant outflow of foreign reserves and a greater dependency on your international suppliers, which can control your economy and industry with these basics.

So people have mostly moved out their funds to the areas where they really see the industrial sector taking up a flight.. i.e Indonesia for coal and rubber, Malaysia for Palm oil, Vietnam for construction related industries, Korea, Honk Kong, Taiwan for electronics etc etc...

Since our only sectors that were attractive were textiles and agriculture are already on a downhill movement and any other industry is also not picking up due to the increased cost of capital and other factors that relate directly to the policies of government, like cement and steel.

The last thing to note here is the rubber-band effect, which the market of Pakistan still has to see when the artificially reduced prices of oil will rebound.

 

[Shahid Abassi]

The cost of production is rising due to government policies, government is sitting on industry's money in billions and don't have the money to pay the refunds, political picture is getting uncertain by every day, trade balance gape is increasing, and our relations with USA and Saudis are at verge of collapsing.

 

[Sohail Shuja]

The cost of production is rising due to government policies, government is sitting on industry's money in billions and don't have the money to pay the refunds, political picture is getting uncertain by every day, trade balance gape is increasing, and our relations with USA and Saudis are at verge of collapsing.

Previously, we had a Credit rating of AAA (Allah, Army aur America), now I think we are likely to become AAC (Allah, Army & China).

Now it is the time for the nation to ask for what good is that Metero for? how the orange line is contributing to close the trade deficit gap? our policies were never in the right direction. They were only good for the World Bank and IMF, to return their loans.