The stock market people are at it again: they want a bail-out. Channel checks suggest that the bears have become all too unbearable for the market, which is why they are hoping for state funds – courtesy the NIT, EOBI and State Life Insurance - to rescue the market from falling further. Should the government do so?
There are many arguments being presented for the bail out. First, that even the US had provided a much-needed support by way of its quantitative easing policy, so why shouldn’t Pakistan. Second, Pakistani stock market is not new to bail outs; we have seen it in yester years, where some flag that earlier bail outs were specifically aimed to helping the government’s friends in the market. On a related note, others argue state funds don’t always buy at the right time anyways; so if they bail out the market when the market is low it would only serve them well.
Then there are those who argue that a few pro-PML-N high net worth individuals (HNI), brokers’ propriety books, and asset management companies (AMC) are systemically pushing the market lower just to make the PTI government look bad, and therefore the government should use its funds to fight back in the market.
Fourth, the market needs liquidity to attract foreign portfolio investments which in turn can help drive up sentiments and also help improve reserves, and this liquidity can best be provided by these state funds at this point.
Let’s take a look at each of these arguments one by one.
Granted that the US had a quantitative easing (QE) policy, but that policy was originally aimed at helping the main street rather than the Wall Street. The spill over of cheap money from QE into stocks and commodities was an unintended consequence, which by the way not seen in good spirits by independent economists.
It is true that the market has been bailed out before. But those were instances of more of a crash than a bearish spell. As the graph here shows, KSE-100 fall from grace between May-Dec 2017, and Apr-2018 to Apr-2019 is one of the lowest peak-to-trough movements in recent memory, and prolonged movements rather than a sudden crash. A crash wipes out savings overnight and creates a shock in the system that ‘may’ necessitate state support; a box standard bear spell does.
And if the bail-outs previously were aimed at helping out ‘friends’, or if state fund managers are indeed poor timers of the market, then so be it; two wrongs don’t make a right. Instead of making these a basis to bail out the market, stakeholders should instead demand that state funds are better managed under the direction of an independent board instead of the wishes of the finance minister who may have historically been pressurised by the market to bail out the market.
Third, if indeed there are pro-PML HNI, AMC and brokers who are deliberately pushing the market down, it does not warrant a counter punch by way of a bail out. Instead, the SECP, which has access to detailed data, should conduct an investigation and penalise those UIN that are systemically pushing down the market. It should be a box standard case of market manipulation.
Fourth, there is no guarantee that higher liquidity will attract foreign players. Remember the MSCI EM inclusion incident? This market has been liquid before, with and without foreign players. And as such save for FY17, the foreign portfolio investments as percentage of Pakistan’s forex reserves have remained poor, which means that foreign portfolio investments are not critical to FX needs.
The bottom line: there is no reason why the market needs a bailout; capitalism should not be a one-way street. Understandably, practical exigencies - such as a crash or a shock - may necessitate exceptions to this thesis. But KSE-100’s current movement is no shock. It is merely reflecting a host of uncertainties and the widely expected slowdown in economic growth. Let’s not shed crocodile tears about it!