What a week! The stock market had been gradually going down since late May 2017, losing about 23 percent by late-July 2018. Between July-end and first week of May 2019, it lost another 17 percent. No panic ensued.
But when the benchmark Pakistan Stock Exchange (PSX) lost nearly 7 percent in just eight days of trade (May 8-17), all hell broke loose and stocks became a prime-time subject. Enter talks of a bail-out fund, and the KSE-100 bounces back 7.6 percent in just five days of trade ending last week. What a week indeed!
Who were the main players during these two periods? Thanks to data aggregated by Investorslounge.com, we know that brokers have decided to neither a buyer nor a seller be (apologies to Shakespeare). During May 8-17, they sold merely $1.1 million from their prop books and bought even less ($0.18mn) when the market bounced back from “oversold conditions" amid hopes of a bail-out during May 20-24.
While mutual funds sold the most during the recent slide ($18.2mn), foreign players, local companies and individuals remained buyers. In fact, it was mostly buying by the latter two (aided by banks) that helped KSE-100 rebound last week, as net purchases by foreign players was mute, while mutual funds and insurance companies remained sellers.
The intriguing bit here is the behaviour of insurance companies. In theory, in times like these insurance players should be acting smart and adopting a buy-and-hold strategy for long term. Yet across all major PSX-listed sectors, insurance companies remain net sellers. They sold nearly $13 million when the market tanked between May 8-17, and $10.5 million even when it rebounded last week. Do they still see further erosion of values at the local bourse? Do they know something that others don't?
On surface, last week's rebound offered some respite. If trade volumes averaged 73 million shares between May 8-17 when the market tanked by 2464 points and created a frenzy; it rose to an average 135 million shares last week when the marked bounced back by 2537 points. Higher volumes in a rising market usually bodes well.
This euphoria may or may not continue, depending on whether or not the government decides to go ahead with the needless bailout fund. But even if it does, one cannot be too sure if the bail out can outweigh fundamental weakness caused by rising interest rates, which is draining liquidity from the equities market. (See KSE-100: heads I win, tails you lose, published May 20, 2019).
In a recent report released over this weekend, brokerage EFG Hermes flagged that “it is not clear whether the 2009 bailout was enough to drive a sustainable market move". “The greater part of the 2009 rally was driven by Pakistan's upgrade to the MSCI FM (which contributed to foreign buying of $400mn in 2009), the recovery in international oil prices, and a global equity market reflation, after an initial boost ignited by the NIT-SEF bailout package."
EFG maintains that in present circumstances, “smooth transition to the IMF programme and the restoration of business confidence will be the key factors in any market recovery". Add to that the likelihood (based on the reading of latest monetary policy statement) that the central bank is going to be hawkish two months onward as well, might spell bane for the equities amid uncertainties surrounding federal budget and the details of the IMF programme at a time when the World Cup may squeeze out liquidity from the market. (For details, read BR Research's ‘Has KSE-100 found its bottom?', May 21, 2019).
Granted the market may be currently facing oversold conditions, and trading much below its 500-day moving average (dma). But consider this: KSE-100's discount to 500-dma lasted about 388 days between June 2008 and January 2010, whereas in the current spell of weakness that discount has existed for about 257 days (May 2018 to-date) (or 309 days in total since discount first emerged in October 2017).
Since, according to most reputable economists, the current economic crises is worse than 2008's, it is reasonable to expect at least another 100 days before the KSE-100 could peak about its 500-day moving average. In other words, those getting euphoric about the bailout ought to tread with caution. A bailout could be a helium-filled balloon that children often play with. When helium fades out or when something pricks the balloon, the children start crying.