FeaturedNationalVOLUME 18 ISSUE # 52

PSX surge: a bubble or long-term trend

The stellar performance of the Pakistan Stock Exchange over the past few weeks has surprised everyone, including the investors and market analysts. Recently, the KSE benchmark index set a new record high amid strong domestic buying and crossed the 55,000 level to close at 55,391.36 points, a historic high.

Generally, stock exchange lows and highs are supposed to have a direct relationship with the health of the economy. But in our case nothing significant has happened on the economic front to justify the continued bullish trend. Some people have ascribed the positive trend in the market to a reduction in Pakistan Investment Bonds yield. Others have cited a fall in the current account deficit and a decline in consumer price index-based inflation as reasons for the positive sentiments in the market.

But these factors do not sufficiently explain the sudden surge at the stock market. As we know, the national economy has been under stress for some time due to raging inflation, high unemployment and rising debt, with the IMF asking our financial managers to ‘do more’. So the question arises: Is the bullish trend a bubble or will it sustain in the days ahead? It is no secret that the Pakistani bourse is highly speculative and open to manipulation by a small number of key players. These players in control of a large proportion of KSE intermittently raise the market level and then bring it down, with the small investors being the main losers.

All governments in Pakistan are in the habit of claiming an uppish stock market as an indication of a strong economy. But this is a fallacy. It is well known that in the past on many occasions finance ministers manipulated the market by encouraging institutional buying or offering tax incentives to investors to pump money into the market. So a bullish market does not necessarily reflect the general trend in the economy nor does it influence the general public and their spending habits. Even in western countries it is comparatively well-to-do people who invest in the stock market, not the poor and those in lower income groups. Several pieces of research have established that it is basically a game of inflow and outflow of cash that the rich play in the stock market. Stock purchases have no direct bearing on the volume and quality of industrial production or the conduct of other businesses.

It may be noted here that in the case of Pakistan, a small percentage of the population is active in the stock market, with the poor and the majority of lower and middle income earners not having enough resources to access the facility. What is more, the regulatory mechanism to oversee the working of the brokerage house is weak in Pakistan as compared to other countries. According to a report, India’s main regulator of stock exchange, the Securities and Exchange Board of India (SEBI), has achieved remarkable success in curtailing manipulative and speculative activities in the market.

A bugbear of the stock market is foreign portfolio investment which is prone to outflows at a moment’s notice. FPI is brittle money and can cause the collapse of a financial market as happened during the 1997 Asian financial crisis. Figures show that FPI was negative 30.1 million dollars during July-September 2022-23 asagainst plus 9.7 million dollars in the comparable period of this year. It is estimated that during the recent stock trading sessions, foreign investors were net sellers of shares amounting to about a million dollars.

As in other countries, in Pakistan too there is no linear alignment between the stock market and the economy in general. As such, Pakistan’s stock market cannot be cited as an indicator of economic revival. To put it another way, in the absence of other strong indicators, rising stock prices may indicate a temporary spurt or a speculative run but hardly a long term trend. According to some equity analysts and traders the prevailing bullish sentiment is driven by a crackdown on dollar smugglers and restrictions on the Afghan transit trade. In other words, the share prices have gone up because those who previously invested in dollars are now investing in the stock exchange. Some experts also attribute the heightened activities in the stock market to a flattening of the inflation curve and expectations of a cut in interest rates.

All in all, one has to be extra cautious in swimming with the trend and putting one’s hard earned money in the stock market. It is also the duty of the regulators to keep an eye on the market movement and ensure that the current surge in the market is not the handiwork of speculators who have often in the past attracted small investors and duped them.