It’s a casino, not a market

That’s what Pakistan’s stock market is

“If you are predicting the 2013 elections of Pakistan, then ignore the polls and analysis of political brains, switch off your television sets, and follow the supercharged Karachi Stock Exchange (KSE). I know this is absurd for any Pakistani, but just give it a shot. At least this is what any average American must have done in the case of elections,” Sam Stovall, Chief Equity Strategist at Standard and Poor 500, told me in an email conversation.

In US economy, stock market has been found as one of the best predictors of the outcomes of elections. For instance, a year back, the market precisely predicted that Obama should be re-elected. According to Sam Stovall of S&P 500, since 1948, the S&P 500 stock index has proved to be a sound prognosticator of whether or not an incumbent president gets to be re-elected. Since 1900, US stock market has predicted the results for elections with 90 percent accuracy. Of 28 elections in US since 1900, 15 out of 16 times the incumbent was re-elected when the stock market went up before elections. And 10 out of 12 times, the candidates lost in re-election, when the market went down preceding the elections.

Stock market is the reflection of investor’s sentiments, the market goes up when confidence is high and when there are prospects for economic growth. If we just observe our current index, it shows that economy is, or “will be”, doing good in the near future; resultantly people would be doing good too. And when people are satisfied with the economy, there are higher chances that they would be re-electing the same government.

Applying the similar index methodology mathematics to the case of Pakistan, we can presume that Pakistan Peoples Party (PPP) does have 90 percent chances of getting re-elected with the present skyrocketing index touching new heights every other day. This makes sense in terms of economic and mathematical analysis. But whether an economic and mathematical analysis is applicable for our markets or not, I canvassed relevant students and professors to take their opinions.

I surveyed 150 students from the Lahore University of Management Science (LUMS) who had some knowledge about our markets. I talked to students from different majors ranging from economics, accounting and finance, political science to mathematics. About 78 percent agreed to the fact that Pakistan’s stock market is more like an elite casino, where only few can play and make money. And according to 90 percent students, stock market and election correlation can hardly work in the case of Pakistan unlike US.

“I don’t believe that the market is doing all good on its own and it is not the true reflection of our economy, something is wrong with it,” Dr Hammad Siddiqui, professor at LUMS and fellow of the Centre of Economics Research of Pakistan, told me, smilingly.

“Tough to answer, but Pakistan’s stock market has always been a myth for many and a straight game for few, just look around at indicators like unemployment, prices and country’s condition, to get a fair idea. You know what you will find,” Muhammad Basharullah, another professor at LUMS and an ex-Merrill-Lynch employee, answered to my question.

Under current stock market conditions, President Asif Ali Zardari has good chances to take credit and this can make up a good portion of his upcoming pre-election speeches. With all due respect, he is an elementary figure behind the first democratic government to complete its phase in the history of Pakistan. But I cannot make any guesses on the accuracy of current stock market stunts.

Recently, the Security Exchange Commission of Pakistan (SECP) has taken several significant steps for the betterment of investors to increase transparency and to encourage inclusion. In July 2012, the SECP even directed the stock exchanges to introduce certification programmes. It is endeavouring to make Pakistan’s stock market a welcoming floor for many.

I hope these steps would gear up the growth of capital markets and would encourage more investor participation. And one day our markets would be more enhanced, ethical and responsible.

But the question whether this praise is right or wrong has another relevant question that also needs to be answered. Is the stock market really touching heights on its own or it has been manipulated by someone? And who is this someone? And from where this sudden inflow of foreign investment is coming, which is giving a sharp boost to the stock market, in spite of the current political turmoil and security conditions? Though devaluation of rupee is helping to strengthen the major exports and stock market, is government intentionally doing nothing to make rupee stable? Any why Morgan Stanley Capital International (MSCI) Emerging Markets Index has refused to include Pakistan in it, when we are meeting their criteria?

For now, I can’t reach on any concrete conclusions whether Pakistan’s soaring stock market can be the predictor of outcome of Pakistan’s elections like the US markets have done for the past few decades. Or will our stock markets fail economic and mathematical analysis, as we are not yet fully aware of the secrets of the floor and the dark side of money making in Pakistan’s stock markets.

The writer is a student at LUMS.