Over two days the market loses something like 1500 points. Market gurus attribute it to the Trump immigration thunderbolt and the regulator needling the brokers. But over the next two days it substantially recovers - with no visible change of stance by POTUS or SECP. What really is going on?
And why are the 'emerging markets' doing so much better than those in the Developed world? Why is Pakistan near the top of the league?
Bloomberg data shows over the last twenty years nine out of ten best performing markets, by US Dollar returns, have been in the developing world. You see countries like Jamaica, Namibia, Ghana, Kazakhstan and Qatar figure in the top table. Pakistan has been among the top ten performers since 2012 for all but one of those five years. Pakistan has also been high up on Bloomberg's adjusted (for price swings, or volatility) index.
India, by contrast, has been less consistent, making it to the top ten only twice over the last ten years. With the Indian economy growing at a much faster rate than ours how do you explain our more meteoric market performance, with the index doubling over the last four years?
Stock markets are driven by fundamentals and sentiments. 'Sentiment', a spaghetti bowl of 'feel-factors', is hard to measure. You just 'sense' it. In its stellar journey the PSX index has been driven largely by sentiment. Lack of investment opportunities for a huge cachet of funds (bolstered by the troubled real estate sector and troublesome foreign accounts) serves as a sentiment proxy. Low interest rate environment and tax arbitrage opportunities add to the market's magnetic pull.
But sentiment alone cannot sustain. It has to be underpinned by fundamentals. A proper gaze through the market crystal ball is hardly possible without a better sense of how the fundamentals will pan out.
Major impetus to the inexorable rise of the PSX-100 index has largely come from the Banking, Auto, Fertilizer, Construction (cement and steel), and Oil and Gas (exploration and marketing) sectors. Most recently, the Textiles sector also perked up a bit on the back of the Rs 180 billion gift in the form of the export package.
Do these 'buoyant' sectors owe their ascendancy to superior performance, or an improved state of the economy? Or is it, rather, government munificence giving them the leg-up?
Banks fattened their profitability on government paper. Government was by far the dominant borrower and SBP happily obliged the borrower and the lender alike through its 'as much as it takes' liquidity injections. High interest rates helped further. But now the winds of change are looking ominous. Interest rates are low, the 'spreads' shrinking, and prospects of the lucrative government securities diminishing (absent the IMF cops there is no check on the government to borrow directly from SBP). Reverting to the private sector would entail more risks and higher costs. All this doesn't seem to augur too well for the bottom line.
Fertilizer and Construction sectors too are dependent on government benevolence. Their fortunes could falter were the government to withdraw the subsidy on gas and the massive protection levels. That steel bars are being sold at more than twice the international prices gives an idea of the kind of tariff protection the government is providing.
Auto has been the spoilt child of the government, raking it in thanks to the massive protection provided by the government. The financials of the assemblers say it all: profit after tax of Indus motors, for instance, grew from Rs 3.9 billion in 2014 to Rs 11.5 billion in 2016. Further, by not providing adequate public transport/mass transit schemes the government does the market development job for the assemblers, offering them a rapidly growing market to exploit at will.
The way the assemblers exploit - no price reduction despite enviable profitability and despite advance payments for delivery five months hence -forces us into a digression. Their oligopolistic attitude, and the brazenness that comes with it, brings to fore the shareholder-value versus stakeholder-interest debate. Increasingly, the best corporates are reshaping their policies to put the customer and the community first. ICI (UK)'s 1987 annual report gave 'servicing customers' as the core objective. The 1994 annual report changed it to 'maximising value for our shareholders'. A rapid decline in her fortunes followed. CITICORP, with that ultimate shareholder value champion Sandy Weill at the helm, fared no better. Years after his retirement, Jack Welch, the hugely admired CEO of GE and seen as the founder of the shareholder value principle, had to finally confess "shareholder value is the dumbest idea in the world".
Hopefully, the new auto policy will serve to make Indus Motors and co more courteous to the customers, if not more responsive to their needs and expectations. Be that as it may, the new policy will not make the auto sector any less dependent on government indulgence.
Apart from the vagaries of government's policy framework - here a moment, there a moment - the market warriors have many unknown unknowns to contend with. Besides the fragility of our nascent economic recovery, external factors - the fall out effects of Trumpian adventurism, oil and commodity prices, strength of the greenback and resultant exchange rate adjustments -could materially impact sentiment as well as the fundamentals.
But, then, it is the unknown unknowns that give you the Black Swan... For the moment, the lack of 'alternative truth' is good news for the market: there is lots of money in search of decent returns, and competing opportunities are few and far between. PSX today resembles the giant vampire squid that sucks in money from wherever it can. The 'bumps' are unavoidable. They cannot be priced, but they create opportunities. What would a market be without the roller-coaster ride? That is how fortunes are made. Let the good times roll - until the bell [email protected]
Copyright Business Recorder, 2017