Stock investors switch to fixed-income avenues
Latest monetary policy has tipped balance in favour of fixed-income investment
A Reuters file photo.
KARACHI:
American business magnate Warren Buffett once said, “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”
Unless someone is a strong believer of value investing philosophy or has a long-term view of the market, the daily gyration might have caused him sleepless nights lately.
Even institutions such as mutual funds, which were pursuing an average Joe to invest in the market due to attractive valuations, are not treading that path anymore. So far in the current year, they have sold a whopping $100 million of equities as opposed to net buying of $300 million during the bull-run of 2016.
This phenomenon of buying high and selling low is not new and not limited to Pakistan’s stock market. During the 2008 global financial crisis, many investors globally and locally sold equities and ran away as if there was no stock market from tomorrow. However, the market recovered quickly in 2009 as compared to the recent bearish spell, which has entered into its third year with no end in sight.
The reasons behind the unprecedented mutual fund selling could be multiple but redemption calls from panicked investors, especially the ones who were lured into the market at the top, and switching to fixed income avenues are the two major drivers. A deep 35% fall of the KSE-100 index from its peak has even caused panic in the Q-block as the index movement is flashed on the media as a daily report card on the economic performance of the government.
The stock market association has finally persuaded Adviser to PM on Finance Dr Abdul Hafeez Shaikh to activate the much sought-after Rs20-billion market support fund, under the management of National Investment Trust (NIT), to pull the market from the abyss. However, it is yet to be seen how far that massive Rs20-billion cushion can go and if the state-run mutual fund NIT is actually convinced that there is enough blood on the street to start buying.
Foreigners, on the other hand, are not in a hurry as they do not see the market taking a V-shape recovery from here considering the tough conditions of the IMF loan programme. However, from time to time, they take advantage of the mouth-watering valuations created due to the clearance sale by the local mutual funds.
Balanced mutual funds which have few more levers than the index or the equity-only funds all are running out of options to steer in such a challenging environment. Adding salt to the injury, the latest monetary policy announcement that increased the interest rate by 150 basis points has heavily tipped the balance in favour of the fixed income investment.
For fund managers, there is not much choice but to sell equities to meet redemption calls, especially if they have run down on the cash reserves of 10% set aside for such eventualities. But for independent investors, with power to hold quality stocks, realising the losses at such a low level (average losses in blue chips are around 50%) and then switching to fixed income to seek recovery will be a far-fetched strategy.
No matter how logical and sane the buy low and sell high strategy sounds, average investors are always caught up doing the exact opposite.
The writer is a financial market enthusiast and attached to Pakistan’s stocks, commodities and emerging technology
Published in The Express Tribune, May 27th, 2019.
American business magnate Warren Buffett once said, “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”
Unless someone is a strong believer of value investing philosophy or has a long-term view of the market, the daily gyration might have caused him sleepless nights lately.
Even institutions such as mutual funds, which were pursuing an average Joe to invest in the market due to attractive valuations, are not treading that path anymore. So far in the current year, they have sold a whopping $100 million of equities as opposed to net buying of $300 million during the bull-run of 2016.
This phenomenon of buying high and selling low is not new and not limited to Pakistan’s stock market. During the 2008 global financial crisis, many investors globally and locally sold equities and ran away as if there was no stock market from tomorrow. However, the market recovered quickly in 2009 as compared to the recent bearish spell, which has entered into its third year with no end in sight.
The reasons behind the unprecedented mutual fund selling could be multiple but redemption calls from panicked investors, especially the ones who were lured into the market at the top, and switching to fixed income avenues are the two major drivers. A deep 35% fall of the KSE-100 index from its peak has even caused panic in the Q-block as the index movement is flashed on the media as a daily report card on the economic performance of the government.
The stock market association has finally persuaded Adviser to PM on Finance Dr Abdul Hafeez Shaikh to activate the much sought-after Rs20-billion market support fund, under the management of National Investment Trust (NIT), to pull the market from the abyss. However, it is yet to be seen how far that massive Rs20-billion cushion can go and if the state-run mutual fund NIT is actually convinced that there is enough blood on the street to start buying.
Foreigners, on the other hand, are not in a hurry as they do not see the market taking a V-shape recovery from here considering the tough conditions of the IMF loan programme. However, from time to time, they take advantage of the mouth-watering valuations created due to the clearance sale by the local mutual funds.
Balanced mutual funds which have few more levers than the index or the equity-only funds all are running out of options to steer in such a challenging environment. Adding salt to the injury, the latest monetary policy announcement that increased the interest rate by 150 basis points has heavily tipped the balance in favour of the fixed income investment.
For fund managers, there is not much choice but to sell equities to meet redemption calls, especially if they have run down on the cash reserves of 10% set aside for such eventualities. But for independent investors, with power to hold quality stocks, realising the losses at such a low level (average losses in blue chips are around 50%) and then switching to fixed income to seek recovery will be a far-fetched strategy.
No matter how logical and sane the buy low and sell high strategy sounds, average investors are always caught up doing the exact opposite.
The writer is a financial market enthusiast and attached to Pakistan’s stocks, commodities and emerging technology
Published in The Express Tribune, May 27th, 2019.