Tracking the economy: The fickle Pakistani stock market

Is our stock exchange really an indicator of the country’s economic prowess, or just a clubhouse for the rich?.

LAHORE:

“If you are predicting the 2013 elections of Pakistan, ignore the polls and analysis of political brains, switch off your television sets, and follow the supercharged Karachi Stock Exchange (KSE). I know this is absurd for any Pakistani, but just give it a shot. At least this is what any average American must have done in case of elections,” Sam Stovall, chief equity strategist at the Standard and Poor 500 (S&P500), recently told me in an email conversation.

In the US economy, the stock market has been found as one of the best predictors of the outcomes of an election. For instance, a year ago, the market precisely predicted that President Barack Obama should be re-elected. According to Stovall, since 1948, the S&P500-index has proved to be a sound prognosticator of whether or not an incumbent president gets to be re-elected. Since 1900, the US stock market has predicted the results of elections with 90% accuracy. Of the 28 elections in the US since then, the incumbent was re-elected 15 out of 16 times when the stock market went up before elections. The candidates lost in re-election 10 out of 12 times when the market went down preceding elections.



That the stock market may be able to indicate which way an election will swing makes sense: the stock index is a reflection of investors’ sentiments, with the market going up when confidence is high and down when investors do not hold a positive outlook. If we just observe the index, it shows whether an economy is, or will be, doing good in the near future. This makes sense in terms of economic and mathematical analysis.

But the question arises whether such an analysis is applicable to our markets or not, for which purpose I canvassed students studying finance and their professors to take their opinions.

I surveyed around 150 students from the Lahore University of Management Sciences (Lums) who have some knowledge about our markets. I talked to students from different majors, ranging from economics, accounting and finance, to political science and mathematics. 78% of respondents agreed to the fact that Pakistan’s stock market is more like an elite casino, where only very few can play and make money. And, according to 90% of the students surveyed, the correlation between the stock market and the elections hardly holds in the case of Pakistan.

Our market capitalisation-to-GDP in 2011 was 15.5%, according to the World Bank. In contrast, India, Sri Lanka and China’s were 54.9%, 32.8% and 46.3%, respectively. According to an estimate by the Central Depository Company (CDC) of Pakistan, a little over 300,000 people hold trading accounts with the CDC. Out of these 300,000 investors, only about 37,000 can be categorised as active traders. Hence, in some respects, Pakistan’s stock market is still way behind many other countries’.

“I don’t believe that the market is doing good all on its own, and I do not believe it to be a true reflection of our economy. Something is wrong with it,” Dr Hammad Siddiqui, a professor at Lums and a fellow of the Centre of Economics Research of Pakistan, told me.

“Tough to answer, but Pakistan’s stock market has always been a myth for many and a straight game for the few. You just look around at indicators like unemployment, prices and the country’s condition, to get a fair idea ... You know what you can see,” said Muhammad Basharullah, another professor at Lums and an ex-Merrill-Lynch employee, when asked if he believed the stock market to be a reliable indicator of the economy.

For now, I cannot seem to reach any concrete conclusions on whether the soaring stock market can be the predictor of the outcome of Pakistan’s elections like its US equivalents, or whether our markets can really make any economic and mathematical analysis fail.

The writer is studying Economics and is interested in Financial Markets and Entrepreneurship 

Published in The Express Tribune, March 11^th, 2013.

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