PSX: to bailout or not to?

Desperate times call for desperate measures. Or at least, desperate requests. Woes of the punting community in the stock market appear to be no different, who seem to have been infected by the recent selling fever.

Market intelligence suggests that few brokers and individual investors are at the verge of default as they took too much risk, and in some instances, relied on illegal leveraging. The market is expecting to decline further in the days to come, which will lead to margin calls and punters will have no option but to sell. For those looking for a bailout by state owned investors, why should taxpayer money go toward covering downside of their high-risk appetite?

Yes, small nudges such as uptick in future markets may be introduced, including measures to lower the volatility given the situation is unprecedented and yet unfolding. These are dire times and immediate economic package is required to feed millions of households relying on daily wages. Profits from state-owned investors must be deployed in improving essential health care services, not to bail out punters.

Apart from relief efforts for food and health of those at the bottom of the pyramid, economic relief through fiscal and monetary measures should be provided to banks and firms directly impacting the relief works. As a phased effort, firms in the essential food and health services segment that are facing cash flow problems or disruption in supply chain, should be extended priority support. These may come in the form of regulatory easing for banks, grace period for debt and interest repayment, lowering GST among other similar initiatives.

It is widely believed that stock market performance does not always reflect real economy. Nevertheless, any relief to the companies which are listed on stock exchange is good for stocks valuation.  Some are of the view that since state owned stocks dominate stock market, these must be bailed out. However, it must be remembered that government does not live on stock valuations; and at the present, it has far bigger worries regarding broader economic woes to concern itself with stock market’s performance.

Not so long ago, market was at 28,000 levels; and government bailout was demanded by punters even back then. Fortunately, there was none, and the market rebounded eventually. Compared to the bear run at that time that was fueled by domestic considerations, the current situation is a global phenomenon. And no package will revive the market till the COVID-19 fears do not subside.

Does that mean that activity should be suspended? There are arguments both for and against it (For details read BR Research's 'Should the PSX be sent on a holiday' published March 19, 2020).

But before any final decision is taken on closure of trading, it may be worthwhile to recall the 2008 experience. The stock market was closed under pressure from few large brokers, it appears that the same lobby is advocating a shutdown today as well. At that time, brokers wanted the market reopened after a month, but fear of foreign investor selling delayed it by another three.

Eventually when the market reopened, a bloodbath followed. And it took years of convincing to bring foreign investors back. This time, if the market must be suspended indefinitely, it must be done for the right reasons and not merely to save speculators.