The Karachi Stock Exchange is notoriously bad at judging the impact of political events on financial outcomes. That means that, for a politically sophisticated observer, market gyrations brought about by mass political protests or other political noise — such as those of this past week — can represent a fantastic buying opportunity…..You may not think this matters to markets and investing, but it does. The KSE is more than just the physical stock exchange and its management. It is the 200 brokerage firms, their thousands of employees and hundreds of thousands of clients all making investment decisions simultaneously that results in a collective view of what they think the future holds. Any market is subject to the delusions and hysteria that grip its participants. In other countries, such delusions and myths tend to be about economic matters. In ours, the political and religious can be quite important as well.
Nonetheless, over the long run, the market is forced to reconcile with reality, because commerce trumps ideology for enough people enough of the time. That means that, while the short run can seem to validate those delusions held by the public, the long run will bear out the investment hypotheses of those who are aware of reality. Let me give you a concrete example. The market appeared to believe that prior to the 2013 election Tahirul Qadri was a big threat to the stability of Pakistan’s political system. Seasoned equity analysts wrote reports speaking of the elections as “if they happen” rather than when they will happen. As Qadri’s pre-rally campaigns reached fever pitch in mid-January 2013, the KSE-100 index dropped 500 points in one day.
Now, if you are the type of conspiracy theory nut who believes that Pakistan’s political system is incapable of evolution, then Qadri seemed like a genuine threat. But if you were sophisticated enough to observe that the system had evolved to the point where enough people had a stake in continuing the political process, you would have been happily buying quality stocks at bargain prices while the suckers were selling. Between Jan 15, 2013, when the Qadri-inspired sell-off happened, and May 11, 2013, when Prime Minister Nawaz Sharif took office, the stock market went up nearly 24pc.
The short-term panic over “Pakistan is about to collapse” would have lost you money. The long-term view of “we’ve got problems, but the largely peaceful transfer of power is about to happen” would have made you money….Whatever your political views may be, the reality is that neither Imran Khan nor Tahirul Qadri have the capacity to bring down the government. And they have neither the capacity nor the interest to affect economic policy. So why would you sell your shares in Hubco or Lucky Cement or Habib Bank? What can the PTI or Tahirul Qadri possibly do to cause a financial loss to these companies? Or really any company listed on the stock exchange?
I suppose one should not blame investors for being scared. Barring five or six people in the entire country, there is absolutely nobody in the media — and absolutely nobody in television — who understands the economy and is able to explain it to ordinary readers or viewers. So perhaps it is not surprising that people have irrational reactions. On Aug 4, the market was down 666 points because of fears of what would happen as a result of political rallies scheduled for later in the month in Islamabad. But remember: for every trade, there is a seller and a buyer. The sellers on that day were motivated by a short-term hysteria that has little basis in reality. The buyers were likely motivated by long-term optimism and fundamental value they see in the Pakistani market. Which side of the trade would you like to be on?…. DAWN