In the recent past, Pakistan stock market has plunged in an unprecedented manner. Some analysts say, ‘it is reflection of the overall state of country’s economy’. Others term it the outcome of geopolitical strangulations. Whatever may be reasons, policy makers have to find the solution and the top item on agenda should be ‘overcoming confidence deficit’. Once faith of people in the incumbent government and Pakistan is established, other problems will be resolved in due course of time.
Ever since, Imran Khan became Prime Minister of Pakistan, expectations of people have been marred by wrong priorities, bad decisions and on top of all wasting time on non-issues rather than focusing on key issues and taking steps that could boost GDP growth rate. His biggest failure is ‘inordinate delay’ in concluding deal with International Monetary Fund (IMF). Around the world, entering into an IMF program is considered ‘certificate of fitness of the economy of the country’. The IMF bailout package may be small, but paves way for disbursement of funds by other multilateral financial institutions. It is on record that the delay in finalizing the deal with IMF has also deferred flow of funds from other multilateral institutions.
Over the years, the opposition leaders in Pakistan have been holding IMF responsible for introduction of policies that penalize ‘ordinary men’ and Khan is not an exception. His uttering against IMF and other multilateral financial institutions has become the biggest stumbling block. However, he has not been able to swallow the bitter pill that living with IMF is like ‘selecting the lesser evil’. First inflow of foreign exchange has to be ensured and only then other impediments i.e. budget and trade deficits could be addressed.
Pakistan stock market may be small in terms of size, but nearly 30 percent of free float is owned by ‘foreign investors’. These investors are commonly called ‘migratory birds’ in search of ‘safe havens’. It is on record that foreign exchange inflows into the equity market have kept the market robust. Ever since foreigners started selling, the benchmark index has been on downward trajectory. This demands a credible reply to a basic question, are the foreigners selling because economic fundamentals have deteriorated? Yes, it is the overwhelming perception that economic fundamentals have gone weaker, but not gone weird. Most of the listed companies are still posting good financial results and declaring modest dividends.
Then, what could be the possible rationale for the plunging stock market? There is an old adage, ‘equity market is driven by greed and fear’; now the word greed has been replaced with ‘earning potential’. Payout history may be a reason, but earning potential becomes a more credible factor. The companies enjoying substantial foreign investment still enjoy attractive earning potential. On the contrary after the recent fall, the prices have become even more attractive. However, one just can’t overcome ‘herd mentality’. Local investors suffer from a phobia, ‘if foreigners are selling, locals should also sell’. At times, even mutual funds and institutional investors also suffer from this perception. It seems they also don’t trust their research.
Let me refer to past practice of NIT, a fund working in the public sector. It used to buy during bearish market, but now it is also reluctant in buying during the bearish spell. Most of the mutual funds operating in the private sector are not ready to buy when the market is going through a bearish spell. Often a question comes to mind, have the mutual funds also become day traders? The political reply could be, ‘they respond according to the market behavior’, which is exactly opposite to their mandate. According to an analyst, “Now the asset management companies have the lowest investment in equities as bulk of the amount is invested in ‘risk-free government securities’. Therefore, they pay less attention to equity market.”
The management of Pakistan Stock Exchange (PSX) will also have to share the blame. Only a few companies have been listed at the Exchange in last 10 years. Often one has to hear a response, “We do not find a reason to list our company at the local stock exchange. Not only that we have to go through a lot of hassle, but also have to pay higher tax”. Over the years the management of the stock exchange has failed in convincing the government that corporate tax rate on public limited companies should be less than the rate applicable on private limited companies.
According to a broker who preferred to remain anonymous, “It is very easy to blame my fraternity, but very few people realize that regulator’s sole role seems to be that of a fire fighter rather than a facilitator. It is true that 2008 equity market crisis in Pakistan was the spillover of a global crisis, but the conditions were not the same. A few but small brokers might have also cheated the client, but apathy of regulators virtually ‘assassinated’ the small investors, as they were not given the option to take an exit.”
To conclude, I will prefer to refer to another saying, “When sailing gets tough, toughs get sailing”. The prevailing situation demands out of the box thinking and bold decision making. If the government is ready to offer amnesty scheme, what is holding it from declaring dividend income tax free and reducing corporate rate tax applicable on public limited companies to 10 percent only. This is not a favor but a reward for being part of documented economy and high tax payer.