Karachi Stock Exchange –– "Alag Chey !"
Only recently I stumbled across a tweet that said:
"Economy at brink of collapse; 16 hours load-shedding, manufacturing units closing and #KSE100 is touching new heights. Any reason?"
with a follow up tweet that said:
"Isn't stock market a leading indicator that reflects the health of the economy ?"
So what's really driving our stock market up ?
Could it be that Lashkar-e-Taiba (Maskhar-e-Taiba in reference to the movie JollyLLB) is pumping money into the stocks ? or perhaps Iranians and Chinese are supporting our market or just as whenever we run out of reasons, we point our fingers at "PINDI" a.k.a "establishment" or more interestingly, our beloved president AAZ (or should I say beloathed ?) could be funding the market himself as an election gambit. Don't worry, I won't put you in a difficult proposition by asking you to select at least one of the above options.MY TAKE:
Since there are multiple elements contributing to KSE outstanding bull run, it would be difficult for me to sum it up in few lines and dub it as "The SECRET of KSE mind-blowing performance" (See chart above) especially amidst all the self-proclaimed economic gurus and politically motivated financial propagandists that you see on news channels and television talk shows, who apparently excel more in trash-talk and seem more worried about how they look on-screen, are constantly warning us of the imminent economic collapse and filling up the brains of the masses with scary economic statistics and consequently the reason why most of our preconceived notions and ideas about the correlation between the stock market and economy are proving wrong for many years. So, while the stock market was busy giving hefty returns to its investors (KSE100 index up 286% since market crash low), the mainstream media on the other hand, instead of educating 'their viewers' more about investment options and money management skills (if they really care more about them than their ad revenues), were busy propagating 'econo-fear' and all you heard was 'Fiscal Deficit', 'Trade Deficit' or let me just write what my brain is echoing right now:
"Muashi Badhaali" "Tijarati Khasara" "Ropey ki qadar mey Tezi se girawat" "Mehangai ki shara mey tezi se Izafa" "Load-shedding/Loot-khasoot ka bazaar garam" blah blah blah ...
By now you must have realized that the popular idea which essentially states that stock markets are suppose to reflect the health of the economy is factually WRONG but before I dwell into the core factor of KSE ever-lasting bull market, allow me to highlight a number of our market's unique features that you probably won't find in any of the top emerging/developing/developed equity markets.
1. Cash Based Market:
Since 2009, KSE has essentially traded free of leverage and short selling activity in ready/regular market is almost zero.
(This is what you'll see most of the days under disclosure: NOTE: Today no Short Sale Transaction in any symbol was declared through F-8 Window)
2. Circuit Breakers:
A rule that restricts a stock price moving beyond 5% or Re 1 (whichever is higher) from its last closing price in a single trading session.
For example: If a stock price settles at 100 then it would trade in the range of 95~105 in the next trading session or if a stock price settles at 10 then the range would be 9~11
3. Compelling valuations:
KSE100 trades at a forward P/E of 6.6x and offers Dividend Yield of more than 7% which implies a discount of 35~45% when compared to Asia Pacific regional peers.THE BIG PICTURE
The core factor behind KSE bull market or any stock market for that matter has more to do with one basic principle which has become a norm now i.e "our natural bias towards GROWTH".
This is just one simplest example. Take any field or subject and look at its timeline to see its evolutionary growth. From big companies to small individuals, all have contributed their bit in this remarkable growth and we are still committed to deliver more. It's astonishing to see how everybody is striving for growth especially when our penchant for growth is not as natural as one might think. Just imagine if you were given an option to live the rest of your life without expensing anything ! No need to work hard to earn money 'cause you can have free food, free shopping, free movie tickets, free everything .. anytime and anywhere. Well who doesn't want to live a carefree life without ever having to go to work or struggling hard to get something, right ? This is exactly why I believe that our inclination towards growth is NOT natural. It's CONDITIONED. In fact, it's actually against our nature and probably the reason why we like the idea of easy money and dislike the fact that there are no shortcuts to success. The same realization behooved us humans to invent and install a system that would ensure continuous growth. An 'incentive based system' proved to become a near-perfect recipe for growth propulsion. So it might have started from a simple 'necessity' like the invention of sewerage system, it has now become more of an 'obsession' as evident from the speedy technology advancement like the invention of smart phones. Now don't say you can't live without a smart phone. (I would happily prefer a sewerage system over a smart phone if I were asked to live with any one of them.)WHO HOLDS THE JOYSTICK ?
Just as our growth obsession has given us so many benefits, the ever-increasing pace of it has made our system overheated. So who controls the 'pace of growth' ? That's where the politics, governance & economics kicks in.
Pakistan is already running on a budget deficit and our tax revenues don't suffice our needs. So when you hear the news about periodic bailouts of government enterprises like Pakistan Steel Mills, Pakistan Intl. Airlines & Pakistan Railways etc. and frequent cash injections to Pakistan State Oil and other cash-strapped companies in the power chain, let alone other deficit spending and transfer payments like development projects, BISP & subsidies etc., where do you think the money comes from ? It all comes through borrowings and it's all debt money whether it's internal (like raising money through T-Bills & PIBs or directly printing money) or external (like securing loans from IMF, ADB & WB etc.). Fixing the economy by means of debt and spurring the growth by pumping the system with cheap money is apparently the only quick and easy cure we've found and as a consequence it eventually inflates prices of everything in the system like commodities, assets & stocks.WHATEVER WORKS - THE SHOW MUST GO ON !
So, while an average Pakistani layman views economy at its lowest ebb through mainstream media's perspective, smart money on the contrary, focus more on the solutions lying around the corner. For instance, you would likely hear the noise building up in the next couple of months about our precarious foreign reserves condition and that we would hardly have sufficient money left to pay for our import bills in the next fiscal year. Although true, but KSE investors are counting on the external finance and is confident that Pakistan would eventually secure a new IMF loan and consequently avert a Balance of Payment crisis.
As long as we (humanity as a whole) have solutions to our economic problems and manage to keep the system up and running so as to guarantee growth, KSE bull market is here to stay, albeit with corrections. In other words, our never-ending lust for never-ending profits would push us to work even more harder (thanks to the 'incentive based system') which in turn would keep up the pace of growth and governments around the world would continue to fuel growth by fixing their economies with whatever tools they have with one and only one motive: "The
growth must go on !"
I'll end my writing in Imran Khan's style and tone:
"Oh KSE mey tabdeeli aayi nahin ... TABDEELI AAGAYI !" ... (crowd roaring)