PSX: To panic or not to panic

Panic has gripped the trading halls of Pakistan Stock Exchange. Yesterday, the benchmark index fell for third consecutive day, extending the losses booked in the four straight weeks ending last Friday. How long will this reign of fear last? That question seems to be on investors’ minds.

While there is no specific reason for yesterday’s fall, the generic reasons being cited are all too well known. Rising inflation, further delays in interest rate cuts, the return of bond yields, the IMF review, and the upcoming FATF moot that is expected to decide Pakistan’s fate over the so-called grey list: these are some of the most cited reasons by boys on the trading floor - and it is really mostly boys.

Meanwhile, the government’s poor management experience is back in the spotlight. If the last time it was about the then pending IMF programme, this time it is about commodities management and ensuing inflation. This has obviously paved a great batting pitch for the opposition, even if the politics of inflation is not back in the full force of ‘dharna’ and protest rally. Rumors of Shabbar Zaidi’s departure from the FBR is not helping, nor are talks of another change in the government’s finance team, even though both have been denied consistently by the government.

But if those few horrifying days of mid-August taught anyone anything, it is this: the time to buy is when there is panic on the streets. Is this then the time to buy or sell? Without getting into the recommendations business, here are certain facts that one ought to consider.

Is the macroeconomic situation today as bad as it was in August 2019 – a time when Indian belligerence in Kashmir had led some analysts to account for war risk premiums? The answer to that is ‘no’. Also consider the fact that last few weeks of selling has made prices lucrative again with the KSE-100 trading at around 6x price-to-earnings, while offering a dividend yield of about 7-8 percent.

Ergo, the bottom to this panic selling may be around the corner – perhaps 39,000. And in the worst case, 37,000-ish. But eventually it should bounce up, albeit within a ceiling that will come to define a broad range. That’s in line with the view that CY20 is likely to be the year of consolidation, because in simple terms, the economy is back from the brink, but prosperity and growth is not on the horizon as yet. (Read also BR Research’s KSE-100: growth restrained? Feb 3, 2020, & KSE-100: the year of consolidation? Jan 16, 2020)