As the stock market opened on the 3rd of July 2023, the index increased by 5.99% or by 2,481 points. This is the single highest gain the market has seen in its history. It was the first time that the market was halted based on the index increasing by 5% in less than half an hour.
Halts on the market are nothing new. The market had actually halted three times during the Covid-19 pandemic but this is the first time that a positive rally had triggered a market halt. The sudden surge was expected of course, given that a deal with the IMF was finally struck on Friday and the threat of default was avoided. But there are many other factors to consider in this equation, and a look at recent history may help us contextualise this run of the bulls.
For the past six years the stock market has been in a general negative spiral. Since touching an all time high of 53,127 on the 22nd of May 22nd 2017 the sentiment has continued to go south. With lack of any substantial trigger, this trend has continued. This was made worse during Covid as it seemed that this feeling of doom and gloom was going to persist. The index reflected this as it was range bound between 40,000 and 50,000 for most of the last three years.
This was, of course, an oddity of the stock market. Pakistan managed the pandemic quite efficiently and corporate results were largely exceptional in this period. Despite this the stock market did not reflect any of these factors. Investors lost interest and as a result volumes dried up and share prices remained low.
The index had plummeted to 28,289 at its lowest point which meant that nearly 50% of the market capitalization had been wiped away. This saw many leading scrips and companies losing price as well. Even when corporate performance began to rebound the market did not mirror this improvement. This left the market being undervalued which was one of the reasons a rebound would prove to be a jumping point for the index.
After the vote of no confidence in April 2022 and the political uncertainty that followed, the depression in the market solidified. As the political situation deteriorated, so did the sentiment in the market and prices stayed stagnant. Things became worse as the word default was suddenly on everybody’s lips and matters with the IMF seemed to have soured.
This was made worse by the fact that at different junctures, the State Bank of Pakistan kept stepping in and, in an attempt to quash the rising inflation, kept increasing the discount rates. From April 2022 to June 2023, the SBP increased the rates from 12.5% to 22%. Many times the rate increases were large in magnitude and surpassed the market expectations. All this had an impact on the market sentiment and investors’ confidence and kept the index in check.
On a fundamental level, the truth was that the companies that were operating in the country were performing well and , with the exception of a few sectors, the performance of many of the companies had been stellar. This meant that the index and the market was considered to be undervalued. This fact could not be ignored by the companies themselves who saw the opportunity to buy their own shares from the market with buybacks. Based on the price multiples, these companies stepped in to acquire their own shares and to absorb some of the liquidity that was available in the market. The markets were primarily concerned about the macroeconomic situation of the country with default at its forefront.
The core of the rally today is rooted in the performance of many of the companies that have taken place since 2020. Once the loan was secured, investors saw that the risk of default had been averted and that there are brighter days in the future of the country. With this loan being secured, other friendly countries have also promised to loan further funds to the country which will shore up some of the aversions that investors had in the market. The market has reacted in the only way it knows and so investors are flocking back to the market. The performance of the companies was always on the right track, however, the share prices that were being seen were not reflective of this reality.
What has happened today (Monday) certifies the fact that the stock market of the country did not account for the performance of the companies themselves. The investors can be given the benefit of the doubt that the risk of default and political situation would have seemed like the more pertinent issues. Once these issues have been resolved, the investors have reacted by running back into the market and showing how attractive the market is for investment.
