PSX: hunting or hunted

At Pakistan Stock Exchange eye popping drops have stopped for the last few days. Is it a pause before posting another eye-popping movement in either direction or is a bottom – a L-shaped move with a long base. It’s hard to say. Only Tarot readers, crystal ball seers or the profoundly dumb can claim prefect vision for where the stock market is headed.

A review of medical and public health academic literature, however, reveals a regional epidemic or global pandemic can potentially last anywhere between 12 to 18 months. If Covid-19 ends much earlier (one hopes it does), then that’s just sheer luck; the one’s who may get it right today (about the duration of Covid-19) won’t be right for the right reasons, but simply because the dice rolled six just when they had an intuition that it would.

For those who would rather rely on reason and literature review of pandemics written as recent as five years ago, the uncertainty over the magnitude and duration of a pandemic would not only affect investor confidence. It would also result in loss of consumer confidence as well as loss of potential workforce.

As things stand right now, governments in Pakistan and abroad have two options. Go for a prolonged partial shutdown punctuated with on-off curfew. Or don’t shut down the economy (ala Sweden) and carry on with our lives as usual.

In the case of former, businesses will shut down, profits will fall, stock market will fall further, and ‘n’ number of lives saved, though no can count whose. In the case of latter, risk lives; if nothing happens or the crises remains manageable, nothing like it. If ‘m’ number of people start dying, panic ensues leading to eventual shutdown, businesses will shut down, profits will fall, stock market will fall further, and ‘n minus m’ number of lives saved.  Either way, things aren’t pretty.

If the players at the PSX realise these uncertainties, then it might soon start tanking again. With sharp downward revisions in GDP growth of Pakistan’s trading partners, exports will take a hit. Whereas squeezing of wallets at home and abroad means that consumer confidence wont spring back up to new highs right after the pandemic ends. This means that valuations of non-exporting companies also call for a re-rating. What looks good at 2x price-to-earnings will look expensive at 4x, when re-rating is done.

Or perhaps they are waiting for April 15 before taking a decision to buy or sell further – that date being the cut-off by which some pandemic observers in the government want to closely look at local infection rate and other related data before making the decision of whether or not go back to business as usual. Unless corona dies before that, it may be foolhardy to revert to normal lives in a fortnight. This is because Ramadan is due to begin around April 24, and as of now, one can’t be too sure if Pakistanis can avoid congregation in Ramadan.

There are those who believe that stimulus packages will come to help. Then again, they would do well to consider the notion that fiscal stimulus in times like these may be more inflationary than imagined. Unlike the traditional Keynesian thrust, government spending and/or tax cuts cannot rev up demand when there is a partial or a complete lockdown and labour mobility is in check. Weigh on that before heading for value hunting; the idea is to hunt and not get hunted.