The more things change, the more they stay the same. At the stock market too, status-quo has won; change has lost. The government is reportedly cooking up a Rs17-20 billion bailout to provide relief to the stock market. This is as preposterous as it can get; there is no fundamental reason to support the market. Period!
The ongoing weakness at the market is a reflection of poor economic fundamentals that began at least as early as May 2017. Soon after the KSE-100 index hits its life high of 52,876 on May 24, 2017, it changed its direction to eventually hit 40,463 points on July 23, 2019 – a slide of 23 percent before the PTI came to power. Since the general elections 2018, it has lost 18 percent.
That it has taken such a long time to erode values shows that it is reflecting genuine economic weakness and uncertainty. Unlike previous crash – say of 2005 and 2008 – there are no threats of systemic risks in the market. There are no amounts of huge margins calls or outstanding ‘badla’ that can derail the financial system.
Unlike the developed west, Pakistan’s capital market is not the place where companies raise huge amounts of debt or equity finance for their expansion or working capital needs. Nor does the stock market in Pakistan contribute to significant growth in jobs. Then why exactly is there a need to support the market? The small savers, the brokers say.
Well, news flash, small savers or big, capitalism is not a one-way street; you earn some, you lose some. Besides, those who have enough to save to invest in stock market are not exactly poor and small to be bailed out. If anything, such money should be diverted to targeted subsidies under BISP, Ehsas or whatever name Islamabad fancies.
Then there is a classic argument that if NIT, State Life Insurance and EOBI bail out the market, they will only stand to benefit as they did immensely after the 2008-bail out. The counter argument is that if these institutions don’t see value at current prices, then so be it. Investment decisions ought not to be forced. The boards of these institutions should be strong and independent so they can take investment decisions on their own instead of working under the dictation of finance ministry.
If the brokers really see great value in stocks at current prices and believe that NIT etc would only stand to gain if they bail out, then why don’t they put their money where their mouth is. Brokers and CEOs of asset management companies have enough deep pockets to come up with a fund of their own. Why can’t there be a stock market bailout fund by the private sector for the private sector ala Hong Kong?
PM Imran Khan should soon stop this grand folly of bailing out the few investment elites, when the poor suffer under the burden of rising inflation, currency depreciation, slowing economic growth and likely ensuing job losses. At the one end, the government is aptly talking about ending exemptions and rent seeking; at the other end it has the audacity to bail out stock market punters.
Khalid Mirza, Chairman of the SECP Policy Board, who has historically been rather vocal against such non-sense bailouts, should also at least publicly release a policy note advising the SECP’s securities market division and the finance ministry to stay clear of bailouts. There are no ‘too big to fail’ players at the bourse. Every spring has an autumn, and sometimes the autumn is longer than usual. Learn to live with it! (See also April 9, 2019 Does the stock market need a bail out?)
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