PSX: clouds of uncertainty

Since the start of February, the stock market has gone into a limbo. While a breather was required after a heated run-up to 50,000 points and consolidation is healthy for every market, the price actions coupled with investment flow are singing another tune.

The SECP over the course of last few weeks has been making more headlines than actual companies news. Out of the blue during one of the strongest bull markets, brokers have started defaulting and every week there is a new name popping up. Show cause notices have been sent to various brokers on providing illegal financing (badla) to clients. Subsequently closed door hearings have also been held. The regulator has finally woken up and is smelling some freshly brewed Chinese coffee perhaps.

While regulation is good and strict controls protect the investors, the situation needs to be made clear to avoid rumour and fear mongering. Asymmetric information be it on securities or regulation creates dis-balance in the market. Over the course of last ten days, individual investors have been heavy net sellers in the market. The word on the street is that brokers have been pushing their clients to sell to clear up their debit before their hearing with the SECP.

Ideally, the SECP and PSX management should come out and hold a press briefing to clear up the confusion. In-house financing has been a norm since years and suddenly shutting it down would dry up the liquidity in the market. The same liquidity which took the market up-to 50,000 points is required to sustain it here be it from mutual funds or individual investors.

With lack of new products and official financing system being so out-dated and small, the problem has been self-inflicted. Two wrongs dont make a right but liquidity and financing are essence of any capital market these.

Counter argument could be made that individual selling is due to factors like profit-taking, Panamagate and overvaluation. While profit taking is understandable but Panama issue has been there since many months now and corporate results have been steady as well. Foreign portfolio investment outflow has not shown any dramatic decrease and local mutual funds are happily buying.

All eyes will be on the Pakistan equity market come May when the MSCI re-classification is due. While we are preparing to welcome foreign investors, the importance of local investors and their sentiments should not take a backseat.