The price of uncertainty

The behaviour at Pakistan Stock Exchange these days is a classic manifestation of uncertainty. Since its 2018-high of nearly 46600 points, PSX’s benchmark index had been making lower peaks and falling bottoms until it hit its two-year low of about 36600 in mid-October 2018. Since then the peaks seems to have been capped at around 41500-41700 points and the bottoms - so far at least – have been rising. In late-December 2018 the KSE-100 hit a low of 37066 and since then it has been trying to avoid a fresh bottom.

Its last attempt to break on through the other side of 41500-41700 was in the first week of February 2019. Since then the market has lost about 2900 points. Unlike the popular perception, the selling pressure has come mainly from local asset management companies that have been selling across the board with net sell between Feb-6 to-date totalling around $39 million. Even foreign corporates are net buyers, particularly in the cement sector.

The biggest buyers throughout this time have been insurance players followed by banks/DFIs who are usually inclined to taking relatively longer-term positions. The time seems to be ripe for them to cherry pick stocks at lower prices levels. This explains why the bottoms so far have not been falling beyond the level hit in December 2018.

But in comes the spanner in the works. The market is increasingly realising the fiscal risks that lie ahead – a realisation that should have happened much earlier. Meanwhile, the secondary market yields of 10-year sovereign yields have started climbing again; it rose to 13.1 percent by Friday’s close, up from 12.87 percent in late February 2019, which had then slid from a recent peak of 13.15 percent late January 2019.

With the monetary policy expected this month, the yields could rise further, and thereby further reducing the incentives for putting eggs in the stock market and the fact that the IMF programme is still to be finalised amid looming uncertainties over fiscal deficits for FY18 and FY19 means, the waters the remain choppy for at least a few more weeks.

And that’s the optimistic scenario, with the downside risks being ~33000 points in case there are slip ups in IMF programme and fiscal deficit bites more than what is being currently expected. (See also BR Research Game of nerves: the plot thickens, January 21, 2019 and)