Gradually, then suddenly!

“Thunderbolt and lightning very very frightening”. Stocks is not what the rock and roll band, Queen, had in mind in when they sang their epic Bohemian Rhapsody. They might have sung “thunderbolt and tightening” in the wake of recent monetary policy announcement. But these are not times for conjectures.

Inflation is hitting new peaks. There are concerns about how inflation is being calculated (see today’s piece on March-2019 inflation) and how it comes to affect the monetary policy decision, which also was rather uncalled for (See ‘Rate hike uncalled for’ April 1, 20109). But there is a difference between how things are and how things ought to be. For the stock market, the cards have been dealt – it reacts to what is and not what ought to be. Here are the cards:

Exchange rate has had fresh round of weakness and based on whose estimations one wants to expect it to depreciate by another 5-10 percent in the foreseeable future. That means foreign portfolio interest will be at bay. There might be some clarity after the IMF programme is finalised, but that still requires patience.

Interest rates are also on the up. And there are genuine concerns why there shouldn’t be further rate hike, some analysts, like Ali Farid CEO of KASB Securities, expect interest rates to reach “low teens”; others expecting another 50-basis point hike. Either way a hike never the less.

While there aren’t any expectations that the stock market will get further tax benefits, the business of tax collection is also faring poor. That’s both because of poor tax machinery and economic slowdown that is in part due to lower developing spending by the government.

This in turn can have interest rate implications depending on the extent to which the government resolves to note printing. Recall also that power tariffs and the prices of other utilities are also on the way up, and that doesn’t bode well for inflation. Ramadan, a usually slow month for the KSE-100, is also around the corner.

So if the benchmark Pakistan Stock Exchange hit its lowest since 6th January 2019 yesterday, then it shouldn’t come as a surprise. Brokers being brokers are like photographers: they can zoom-in intently and beautify that one rose bud lying on a garbage heap, which in their language means hunt for values at lower price levels. But what if values could be hunted at levels lower than current? Ernest Hemingway once said there are two ways of going bankrupt: gradually, then suddenly. The same often applies to bearish spells in capital markets!