Sometimes it feels that ostriches, and not only bulls and bears, exist at stock exchanges. Granted that markets are driven by the sum of perceptions, but how else would one describe the market’s behaviour when fear is not being adequately priced-in.
When Covid-19 surfaced on the horizon, the KSE-100 tanked. And perhaps rightly so. Afterall it was and still is once-a-century event. But then those attractive valuations kicked in, enabling the benchmark index to find bottom near 27,000 points around late March 2020.
From then onward, there was a sharp rebound, which lost momentum in June when Covid-19 cases went sharply up. However, as soon as Covid-19 cases peaked, the benchmark Pakistan Stock Exchange gained strength and didn’t look back until around early-September 2020. That’s roughly around the same time when daily Covid-19 cases began to rise again (on 7-day moving average basis). Not surprisingly, the KSE-100 has been weak to range-bound since September, even as its performance in the week-to-date has been much better than what would have otherwise been expected.
Surely there are a host of positive vibes. Remittances, and overall current account surplus; higher liquidity and expectations thereof thanks in part to Roshan account; Biden’s victory in the US that is giving global markets a reason to be happy; and then of course the promise of a vaccine, Pfizer’s and others’. But what is not being priced in, it seems, that monetary easing may be a thing of past – following the discussions with the IMF. Nor, more importantly, does it seem that Covid-19 sudden resurgence is being adequately priced-in.
As it turns out, daily fatalities as percentage of daily cases is at its highest in Pakistan, and unlike the first wave in Pakistan, the second wave still seems to be in its initial phases. A country wide complete lockdown has not been announced yet, and perhaps won’t be announced, if Islamabad’s earlier preferences are any guide.
But even if it is announced, consider the fact that lockdown fatigue has long set in, whereas Pakistan’s miraculous recovery from the first wave has convinced people that Pakistan is an exception, leading to complacency among citizens. This implies the second wave may be worse than the first, especially considering the onset of winters which is suspected to stoke this pandemic. As for the vaccine, one should not expect it to be widely available in Pakistan over the next two quarters.
All this will not fare well for domestic sales, whereas as the second wave grips developed parts of the world, Pakistan’s exports may also take a hit as well; after all there is a degree to which Pakistan can capture market share.
Granted that all these fears may not necessarily come to life, and tomorrow morning Gabriel descends from the heavens to protect Pakistan from Covid-19 under direct orders of the Almighty. But miracles aside, as things stand right now, rationality demands pricing of these fears. Failure to do would appear to be acting like an ostrich. As for sniffing bargains, beware – for the sectors that offered hope earlier this year may be due to correction.