Is Pakistan Stock Market on the downward spiral again?

Pakistan Stock Market (PSX) has been giving a roller-coaster ride to its investors since past many years. The inconsistency that has now become a glaring mark on the face of PSX is the result of -inter alia- the economic shambles and political instability. Unfavorable Balance of Payment, Budget deficits and mammoth foreign debts all paid their regards in stymieing the exponential growth of the PSX (and later bringing it down).

The unpredictability and inconsistency have been so much in the performance of the index [PSX] that in 2017 it was positioned in top 5 best performing Markets in the World while getting title ‘the Worst Market of the world’ the following year. In 2019, after touching the lowest ebb of 28,000 points, it showed a dynamic recovery and reached 44,000 points. Now again the PSX is on the downward spiral and where it would stop this time, is anyone’s guess.

So the question is what would work for the PSX recovery? Certainly, the current government has done some real work in getting the country off the hook of FATF grey list. The sword still hanging and if it fell, the repercussions would be disastrous for PSX and economy overall.

The Stock Markets around the World – from the U.S. to China and from India to Japan – show a consistent pattern in their performance. The stock Markets reflect the overall current in an economy. A number of factors affect the performance of the market. Among these factors the international commodity rates like that of oil, cotton and gold, play a pivotal role in dropping or picking up of the economy. Where the economic policies and the political stability prevalent in a specific country also influence the market, the role of rumors in markets are also juxtaposed with them in significance.

That’s why in the countries with the relatively stable economic and political circumstances, the fall or growth of the market is not that much dramatic as we see here in Pakistan. Markets there grow slowly but on solid financial foundations. Considerable changes [if any] are only seen when some government or the policy for that matter is changed. Otherwise, it’s all the smooth sailing. Such consistencies also hoist the confidence of foreign investors which resultantly brings the foreign direct investment (FDI).

Conversely, the PSX is faced with the myriads of factors responsible for its decline. Economic policies of Pakistan are dictated by the Bretton Woods institutes with the latter being the creditor of the country. The political landscape has always been influenced by the ever more powerful army of Pakistan. With these two important pillars of Pakistan mired with uncertainty, the investing in the market has been – most of the time- walking on a tightrope. The economic policies given by the IMF aim at squeezing the maximum out of the economy so as to get back what the country owe to the former.

A glaring example of it recently is doubling of interest rates in the country. This move drastically cut the profits of all the listed companies and even nudged some of them towards loss. On the similar pattern, many governments are toppled and some crippled on the whims of the Establishment in Pakistan which in return created chaos of uncertainty and many investors pulled their investments from the Market.

Another factor which has been a cause of worry for the PSX in recent years, is inclusion of the country in the grey list by Financial Action task force (FATF). Pakistan was placed on the list because of some events of money laundering unfolded on the state level. The tag of grey listing kept the foreign investors at bay from the PSX which deteriorated the performance of the market.

The PSX recovered from 28000 points because the government successfully gave the impression that the economy was completely out of the woods then. That confidence brought billions of rupees back to the market, which bounced back in no time. But, all those claims proved just a desperate attempt to make way for the remaining avalanches of funds from the IMF.

As soon as the financial statistics came out after the month of January, it showed the worst inflation –over 14%- in the history of the country and the interest rate was also not eased despite previous promises by the government. These figures eroded the confidence of investors. To add fuel to the fire, some rumors about change in the economic team of the government [once again] are surfaced on the Media which further aggravated the pessimistic sentiments of the investor. These factors indicate that surely the PSX is on the downward slope again which sees no ending in sight.

So the question is what would work for the PSX recovery? Certainly, the current government has done some real work in getting the country off the hook of FATF grey list. The next meeting of the financial watchdog is scheduled in China, and prediction has it that Pakistan has fair number of chances of getting out of the grey list this time around.

This must work to the satisfaction of donor agencies as well as the investors. But all this will work for the short time if the government keeps doing window dressings instead of taking revolutionary steps of implementing the structural reforms and paving the way for the self-reliance of the economy.

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