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A crucial week was expected for equities at the Pakistan Stock Exchange (PSX) last week. Market action during the week didn’t betray those expectations. The most interesting expression of last week’s market action was put forward by Gohar Rasool, Head of International Sales at Intermarket Securities Ltd. He said the market is acting like Buridan’s Ass – named after the French philosopher Jean Buridan who first coined that famous donkey paradox.

There are a few versions of the Buridan’s Ass paradox. The one Gohar used so goes that a donkey which is equally hungry and thirsty is placed ‘precisely midway’ between a stack of hay and a pail of water. Since the paradox assumes the donkey will always go to whichever is closer, it dies of both hunger and thirst since it cannot make a rational decision between the hay and water. “Like the donkey of the parable, stock market participants have been rendered immobile by daunting ‘what ifs’ of an unknowable future,” Gohar wrote in his weekly July-5th review of PSX equities.

The “what ifs” in question as discussed last week stem from IMF’s conditions – details of which are yet to be released; an uncertain outlook of inflation and external account; a new volatile exchange rate regime; and fragile fiscal outlook. All these are the great unknowns that could give birth to serious market risks, which some leading brokerage houses aren’t flagging in their reports (See BR Research’s A crucial week for PSX equities, July 1, 2019).

“With major macroeconomic concerns addressed to a larger extent, we expect market volumes to pick up going forward. This will be further supported by commencement of result season where any earnings surprise and/or announcement of bonus/cash dividend may generate investors’ interest in select scrips,” wrote brokerage BMA Capital in its July-5th report.

In its weekly report, brokerage Arif Habib Limited (AHL) expected “the market to remain positive in the upcoming week in lieu of the IMF package approval and recent appreciation of PKR against green back which will lift investors sentiments,” despite the various risks it identified in its report, including external imbalances, manufacturing slowdown, higher inflation and tightening monetary policy.

Will the market be uppish this week (extending gains for the rest of this month), as brokers BMA, AHL and some others argue? This question takes us back to Buridan’s Ass paradox that Gohar invoked – albeit another version of it. In this version, instead of a haystack and pail of water, the donkey is unable to decide between two equal haystacks – labelled as ‘x’ and ‘y’ – placed at equal distance, ceteris paribus. And because it could not compare which of the two haystacks is the optimal choice, as a consequence it dies of starvation.

For some market players, the two equal haystacks in question are as follows: ‘x’ means ‘if I buy now, I risk losing later if the market falls, if the risks identified above materialise or if the risks turn out to be bigger than currently expected’; whereas ‘y’ means ‘if I don’t buy now, I risk losing the profits that I might make if the market rises, if the risks identified above don’t materialise or if the risks turn out to be smaller than currently expected’.

However, these two haystacks are not necessarily perceived to be equal – and therefore the Buridan’s Ass paradox does not necessarily hold in the market. Since most stock-market players have already booked a lot of losses over the last two years, these haystacks can be rephrased where option ‘x’ means ‘I must avoid losing further’, and option ‘y’ means ‘I must avoid losing the opportunity of gain’.

Between these two rephrased haystacks, and in light of the losses booked over the last many, many months, option ‘x’ seems rational. Which is the why the market would likely lack the lustre, if not fall further until incompleteness of information (about macro, fiscal and currency risks) is reduced substantially. (See also BR Research’s ‘Has KSE-100 found its bottom?’, May 21, 2019 & ‘Stocks rebound: a helium-balloon?’ May 27, 2019).

On a lighter note, it would probably be a good idea to add the statue of Buridan’s Ass smack in front of the PSX building, in addition to the statues of a bear and a camel as a reminder that stocks don’t always follow a bull run. (See ‘Time for statues at the PSX’, Aug 24, 2017 & ‘Camel at the PSX’ Sep 17, 2017).

Copyright Business Recorder, 2019

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