The Pakistan Stock Exchange plunged to its lowest level in three and a half years after losing 2.3% of its worth on Wednesday. Some TV channels quickly flashed breaking news, calling it a crash. The benchmark KSE-100 index shed another 1% (at 1pm) on Thursday, but it still isn’t a crash — not yet.
There is no agreed threshold to determine what qualifies as a market crash but leading financial services website Investopedia.com says it is a double-digit percentage drop in a stock index over a few days and is often unanticipated.
By this standard, if stock prices fall by at least 10% over a few days it could be an indication of a market crash. Before we come to how much the KSE-100 index lost in percentage terms recently, let’s first examine what’s happening at the PSX.
Pakistan’s capital market is the world’s worst performing equity market this year with a negative 20% return on investment. This simply means on every Rs100,000, investors booked a loss of Rs20,000 since January 1, 2019.
This hasn’t been a good year so far, but the market had already been performing poorly for over two years. The KSE-100 index, a gauge to measure the market’s performance, has shed 41% of its value since May 2017 when it peaked at the 53,000-point level. It is currently hovering at 29,000 points but that didn’t happen over a few days or even weeks. This decline was long and steady.
One may argue the last six sessions (including Thursday’s) were particularly bad, but the index barely lost 5% of its value during that time. Now compare that to the 2008 market crash.
The market peaked to the 15,760-point level in April 2008 before it started falling abruptly, prompting regulators to put a floor (not allowing the index to fall below that level) at 9,144 point four months later. When the floor was lifted in December of the same year, the index came crashing down to the 4,782-point level, losing nearly half of its value in just 15 sessions. Yes, that was a crash.
By contrast, if we look at the market’s recent performance, we haven’t reached that yet. The index has been losing its value for nearly two years while much of this recent decline can be attributed to events that matured over a longer period.
The market has performed poorly with KSE-100’s movers and shakers, from the key sectors of oil, banks, automobiles and cement, reporting losses or lower profits. This coincides with the central bank’s interest rates peaking to an eight-year high of 13.25%. Because of a higher interest rate, which reached its current level over several months, investors have taken money out from the risk-based equity (share) market and invested it in debt instruments like bonds. Why bother with the stock market when you can earn 13% risk-free profit is what has been driving investors’ sentiment.
On the political front, there is barely any positive news. Two former prime ministers and a former finance minister along with several key politicians from main opposition parties are in jail over corruption allegations. When the opposition is pushed to the wall, market sentiment can’t be positive. The ongoing trade war between China and the United States and a slowdown in global economic growth are other factors that have hurt investors’ sentiment. All of these factors combined have been dragging the market sentiment as well as the index down for quite a while, not abruptly as is the case in a crash.
News from Kashmir is the only unanticipated event, but some analysts aren’t even counting it. Though news that India revoked Kashmir’s special status coincided with the recent plunge in the market, analysts believe international investors didn’t react to it as much as local investors did. International investors would take their money out of Euro bonds (issued by Pakistan) if they felt panic over the Kashmir news, but that didn’t happen.
Crash can’t be ruled out
When market nosedived on Wednesday, local media jumped to the conclusion that it was a crash. Some reporters might have used the term in a literary sense, but analysts believe a market crash can’t be ruled out.
When there is panic, you never know where it stops, they say. During the course of typing this report, the KSE-100 index lost another 2% (at 2:40pm) and if that trend persists, we are certainly heading for a “market crash”.
Should you buy or sell?
Whether you should invest in the market or not depends on whether you are looking for a short-term investment or a long-term investment. If those looking to gain a good profit over the next 12 to 18 months, it is certainly not wise to invest in the PSX. However, those willing to invest for a longer period of, say five, 10 or 20 years, should buy because the market is down and buying shares is cheap.
But wait, should we not wait for the market to fall further before we buy?
This is a tricky question and most analysts are not able to answer clearly. Consider this: during the intra-day trade, the market fell to a low of 29,400 points level before recovering slightly later in the day. Of the analysts we spoke to, some say the market has a support at the 29,000-point level — that is, it may not fall below this level.
But there are others who say if it falls below that psychological barrier, it may even hit the 25,000-point level. A situation like this certainly tests one’s patience and judgement, but one analyst put it like this: whether you buy now or wait for a few days to see if market goes up or down doesn’t matter much if you are investing with a long-term perspective.