Stock market blues

A major reason behind the plunge appear to be the investigations being carried out regarding the activities of brokers

The Pakistan Stock Exchange (PSX) has endured bearish sentiments of late, with the index retreating to levels last seen when there was a tussle going on between the brokers and the Securities and Exchange Commission of Pakistan (SECP). At the time, the brokers were unhappy over the strictness of some regulations, with the index plunging to the 28,000-29,000 level, which was made worse by the rout in regional markets and foreign outflow. This time, however, the matter is somewhat more serious.

The purpose of integrating the country’s three stock exchanges was to be able to find a strategic investor who would take control of 40 per cent of the stake in the PSX, currently sitting idle in a blocked Central Depository Company account. There was also a need to show that market participants were complying with regulations, as authorities look to attract more investors and foreign participation. A neatly defined regulatory framework for the PSX is definitely needed to gain the trust of investors, who have always been wary of the stock market being manipulated by a few for personal gain. Conversations with SECP officials would make one believe that once the framework for the PSX is laid out, the market would recover from the current plunge and get back on its north-bound journey. The fall in global crude oil prices may be one reason for the dip, but we must remember that Pakistan’s macroeconomic stability should support the PSX against such developments. One of the major reasons behind the plunge appear to be the investigations being carried out regarding the activities of brokers, with officials of one brokerage house ending up in remand. An emergency meeting of the PSX board of directors has been called as there is increasing concern that the investigation being carried out against brokers is turning into a witch hunt. There are indications that these concerns may have some validity. Ostensibly, the brokers are being investigated over a flawed research report that led the EOBI to invest in a stock that then lost its share value. On the surface, it does sound implausible that investors will rely on research reports in isolation without conducting their own research. If the intention behind the investigation is to curb market manipulation, we welcome it. However, the intention seems somewhat tainted with personal motives and we are inclined to believe that nothing substantial would come out of it besides the stock market suffering from similar plunges.

Published in The Express Tribune, January 16^th, 2016.

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