MINDSET IN THE MARKETS:
When the market is in a Bull run, you have pundits coming out of every nook and corner and giving their technical calls, fundamental analysis, 24 month outlook, target prices that defy gravity and logic and the same pundits, if the market changes the direction, become so pessimistic and create such panic that you begin to feel, it is the end of the world.
Both approaches are emotional based.
One is out of greed and euphoria and the other is based out of fear and panic. And once emotions creep into your analytical mind, you are only left with the mind part, analytical part goes out of the window. Another thing that I have noticed quiet a lot in Pakistan is that people try to find likeminded investors and build a social circle based consensus that attests to their preconceived decisions. If they think that the market or a stock will go up, they will usually seek opinions from people who think the same and vice versa. Any opposition to their views is considered sacrilegious.
There are always two stages in an investors’ life cycle. When the market has been going up in a Bull Run for months or even at times for years, and all of a sudden it begins to reverse. The moment it goes into a reverse mode, denial comes in. Their minds have become so used to making money, repeatedly and with ease that they are ready to accept that the gravy train has come to a sudden stop. They start to buy every stock at every dip, calling it averaging down. Until a time comes that they have actually tripled their exposure through continuous buying on the way down that they are now sitting with a huge quantity, multiplying their losses, having a mental war with the market screen and unable to take a decision. The second stage is when the market has completed it Bear Run, is about to turn around, at this time the investors have such bad memories of the market going down, continuously that they refuse to believe that it is about to turn around. They refuse to buy value and hold because value does not give you instant profits every time, it may take some time for value to be noticed by other investors. But non value, speculation based stocks, euphoric buying, Bull Run days, institutions building positions, all these things give you quick profits.
Time and again I have made the same mistakes when I was new to the markets. I learned the hard way. Very hard way in my career.
I still remember very clearly when the market was at 48,700 and I had written an article that I do not see this market sustaining this level and I cautioned everyone to be extremely careful, people who were going through the first stage, what I mentioned above, jumped on to the article and reacted harshly. Perhaps in disbelief because I was the same person who was absolutely in favor of our markets few months earlier. And for me to turn around and begin to oppose the same market, was perhaps a shock to them. Very understandable. I respect that.
But the trick in the investment world is never to “Get Married” to the market. A slang we used on Wall Street. Never marry a stock, never marry the market. Never marry your positions. Meaning, be ready to change your views before others do or you are forced to change your views. You will lose money when you are forced to change your views. You will save money when you do it before others change their views. Your views matter none, markets are bigger than you and I collectively. Our opinions can only guide us, our opinions do not set the direction of the markets.
REALITY Vs. PERCEPTION
Our exports never grew in the past 7 years. Our Current Account Deficit kept growing. We kept bleeding our Foreign Reserves. Our Budget Deficit was spiraling out of control. Our External and Domestic Debt was piling up faster than we could count the zeros. Our Circular Debt, even after paying it off all once, Rs 500 billion, it again crawled up to Rs 900 billion within 4 years, our Public Sector Enterprises, 180 plus or so, bled money to the tune of almost a Trillion rupees. Our currency was considered overvalued, artificially, by foreign lending institutions. We were inducted in The Emerging Markets Status but failed to attract any investments. We brought no reforms in the markets for the bad times because we thought that the markets will never end the Bull Run. PSX management changed hands and we kept opposing the management only because we do not like foreigners, as ugly as it may sound, but that is the reality. We like foreigners when they are buying our stocks from us at exorbitantly high prices but if they buy our stock exchange and want to manage it, we dislike them. SECP as always, kept its tradition of slumber and brought no innovation in the markets, rather it was involved through its Chairman Zafar Hijazi in assisting the previous government in tempering with the records.
Then how was the market going up and up if all these things were happening ?
Well, Pakistani markets work more on perception than on reality. Many of the investors are not astute or savvy enough to gauge a real direction in the markets. And the ones who are guiding them, the Stockbrokers, mostly are not very knowledgeable themselves. In 70 years of our history, we never even initiated a test to gauge the knowledge of the brokers. You could be selling onions today and become a stockbroker tomorrow and advise investors.
With such a structure on the capital markets and a small investor base of 239,000 countrywide and not more than 50,000 active investors for an $80 billion dollars market capitalization, a small number of “Seths” control the direction of this market.
NAWAZ SHAREEF and His Perception.
When Nawaz Shareef came into power, the perception was that he is a businessman himself and that would be a positive trigger for our stock markets. And absolutely it was. In the beginning of the NS tenure, we were all happily enjoying the Bull Run. Because the first year or so, we were absolutely unaware of the economic situation and how the numbers were being played with, not the corporate numbers, but numbers of our economy. We never knew that $7 billion dollars of foreign exchange was spent to keep the rupee strong albeit at the cost of a depleting foreign reserve. We were told that once the circular debt is paid off, the government would never let it crawl up again, which it did and crawled up double the previous amount. The list can go on and on but the biggest advantage Mr. Shareef had was his perception in the public eye as a businessman.
Perception in the stock market is at times stronger than reality. Perception brings in FDI. Perception creates euphoria. Perception gets ratings upgraded. Perception creates absolute bull runs. Until the gap between the perception and reality starts to widen and the general public starts to realize that the perception is not becoming reality. And this is where the sand castle gets wiped out by the waves. And that is exactly what happened by the 3rd year of NS administration. The perception, based on Darnomics, Ishaq Dar’s adamant way of running our economy, started to unravel. It started to come apart. Add to this disaster in the making, the habit of investors not believing the Bull Run has ended, created absolute confusion. Some said the markets would turn around after elections, some said that all will be well with the new government taking over, everyone had a differing opinion. But none of their opinions could reduce the Current Account Deficit, or stop the Public Sector Enterprises to stop bleeding Rs 1 trillion, or having our currency from tanking, or having our exports increase or anything else that could help our markets revive.
Another perception died that Imran Khan could fix the economy and Asad Umer can perform wonders. Again we Pakistanis, as always, first followed Nawaz Shareef perception and dived into the markets and this time believed new governments’ perception that we ourselves created in our heads, not the new government, that all will be and can be fixed within days of Asad Umer becoming our Finance Minister. A ridiculous notion based on hope alone. No FM can fix deep rooted economic problems within weeks or even months. No FM in the world can do that.
So this time, our perception coupled with the ongoing accountability, created panic. I had written an article after Imran Khan came into power that if he starts the accountability across the board, our stock market will also suffer because at least 27% of our market capitalization is comprised of government listed companies such as SSGC SNGP PPL OGDC etc. If there is accountability within the government listed companies in addition to individuals, of course, a fear will be created, further negativity will creep in, people would sell their stocks in these companies and that would create a double whammy. Selling pressure on top of selling pressure.
WHERE ARE WE HEADING AS A MARKET ?
I am sure this is the only part that you were waiting to read. Well, this is a trillion dollar question, where are we heading as a market ?
In my opinion, and I am neither short nor long the market, I am absolutely out of the market for a while, so my opinion is neutral and for others’ guidance only. In my opinion, we are nearing a bottom. Have we reached a bottom yet ? In my opinion, No.
A bottom can only be predicted when the worst of the earnings have been factored in, all economic indicators have been calculated in, absence of triggers is worked in, macro and micro economic issues are reviewed plus several other historical market numbers are worked in as well. And historical numbers over a decent time span, lets say 10 to 15 years, usually help predict a future strategy.
Our markets during euphoria, historically have traded at multiples way north of 10. And reverse this trend and you will notice that in the times of panic going back 10 years, we can see multiples south of 6. A multiple of 10 is of no use for our calculations since it was the euphoric times multiple. So the only thing we are left with is the panic time multiple. Based on that number, we can say that our markets can settle somewhere between 31,000 to 33,000. THIS IS JUST MY OPINION.
Another bad news that could turn into good news is that we getting kicked out of The Emerging Markets status. Yes, sometimes bad news is also good in the markets. We are so small in the EM status as a market that nobody even notices us. Add to it a negative perception internationally, institutions usually stay away from EM small markets. We going back to The Frontier Markets status, where we at least have some decent weightage, can bring back some excitement along with some investment funds as well. That could be a positive trigger in my view.
So the approach even at this time should also be cautious. But cautious with a view to be ready with cash on the sides to enter when the opportunity knocks and I believe that we are fast approaching the point where the opportunity will know and lure us all back into the markets again.
Until then, may Allah be with you. Ameen.