Is anybody looking out for the share market?

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Doesn’t look like it
Yet another week has passed with the finance ministry providing no clarity about the immediate economic future. First the government did nothing, leaving investors with the one thing they hate even more than bad news – uncertainty. Then, just as the market fell through the floor, it decided to hold discussions with the Fund. But then, when somebody reminded the leadership about their promise to die before going begging to the IMF again, they decided to try their luck with friendly-country bailouts instead. And now that we have some billions in commitment from at least one country – and promises of another to come shortly — it turns out that we need an IMF program after all. But that’s still not all. All this didn’t keep Finance Minister Asad Umer from claiming just the other day that if the Fund’s demands are too extravagant by our standards, well, we’ll just drop the program.
So where does that leave us? And does anybody in government even realise that whenever they perform one of their routine U-turns on economic policy, the stock market takes a summersault? Already billions upon billions have gone to Money Heaven because of the policy paralysis of the new government. And, perhaps worse still, all this business has got foreign investors to pack up and leave in droves; sending the worst possible signal to the foreign investor. Still, sadly, no clarity from the government.
So let’s try and make sense of all the signs. For the market, only money matters – as does for the country at the moment. And the only clarity so far is that of the grand cumulative Saudi bailout of $12 billion — $3b to look pretty at the SBP, $3b deferred oil payments for three years — $1b will finally find its way to the central bank in the next few days. It’ll provide some relief to the rupee, especially after the battering it took day before yesterday.
It is important to understand the impact of a devaluation, however controlled, on the market and investor sentiment. While it may bring the currency more in line with its fair value, it does have an immediate detrimental effect on existing investors. And since investor sentiment is quickly echoed far and wide, such steps are usually taken very, very carefully.
Here’s how it works. Suppose all else remaining constant one dollar goes for a hundred rupees and a certain share goes for exactly one dollar at the Karachi Stock Exchange. But then the rupee drops taking, say, the rate to Rs110 for a dollar. Now, even if stellar quarterly results push up the share price a notch, the investor looking from far away will end up losing in quantifiable, dollar terms. On the flip side, if the market too turns and sends the share prices lower, foreign investors will not have to stick around long to see how this particular market serves their purposes.
This, to cut a long story short, is precisely how the last couple of months have led to an investor rout at the local bourse. To be sure, a lot of money came to Pakistan after the MSCI Emerging Market upgrade. But then a lot was needlessly lost to political overlap, when politics dictates market direction, in the wake of the Panama trial. And what remained was squandered by PTI’s lack of policy, direction and most likely understanding of the situation.
Does anybody in government even realise that whenever they perform one of their routine U-turns on economic policy, the stock market takes a summersault? Already billions upon billions have gone to Money Heaven because of the policy paralysis of the new government
For the capital market to revive, the government will have to take steps that plug leakages and ensure an environment where the political situation is not allowed to cast a dark cloud over investors. The way things stand, unless the market gains at least 50pc, it just won’t have the life to keep going.
On the other hand, such devaluations can be attractive to new investors. That buying price made suddenly low by only currency movement is attractive is not exactly rocket science for market players. But, again, who is to account for the uncertainty? New entrants, in such circumstances, always notice a lot of their kind heading the other way when they enter the market. And once they see patterns of inconsistency, they hesitate to commit long term. So, even if the currency market is eventually brought in line, there’s no guarantee that investors will be attracted. And there’s certainly no saying how long the share market will be protected.
As for the rest of the bailout money, both Saudi and Chinese, there is just no news. All we hear from the government is that all will be well. Well, as the blood on the market floor bears witness, that much just won’t do. Also, while shrouding the deals, Chinese especially, in mystery and secrecy, PTI forgets its own past when it attacked PML-N for striking secret deals. It is against democratic principles, they said, yet now they defend Chinese requests of not disclosing how their taxpayers’ money is being spent on bailing out Pakistan’s excesses.
Not only do such steps provide no clarity, they also hurt investors. Only punters enter the market for short term gains. Investors, at least the kind Pakistan needs at this time, are always long term players. When they come to invest in a new market, it’s usually at least a five-year position.
There is an urgent need for the government to provide details about its economic policy, especially the conditions behind the bailouts. It is not only necessary from the local political point of view but also very important from the standpoint of foreign investors and the larger interest of the economy. Whether or not the government realises the gravity of the situation will become clear in the coming days.