Capital markets likely to face challenging time amid COVID-19

KARACHI: Pakistan’s capital markets may face a challenging time if the cases of COVID-19 rise exponentially after witnessing wide fluctuations during the outgoing fiscal year of 2019/20, government’s economic survey document said on Thursday.

“The government is gradually easing the lockdown to invigorate the economy. However, much will depend on the epidemiological data,” the survey document said.

In FY2020, the capital markets witnessed wide fluctuations. In the stock market, the KSE-100 index reached the year’s highest point in January, plunged in February and March, but surged again in April. The debt market witnessed an outflow after the COVID-19 pandemic hit the world. Globally, the demand is slowing down and the world economy is entering recession.

“The stock market has so far shown resilience to global shocks. Stability on the macroeconomic front is crucial for capital markets,” said the document. “An environment of low and stable inflation, moderate external borrowing needs, and sustainable fiscal management all contribute to lowering the cost of capital market finance. These factors also facilitate steady growth and reduce uncertainty, which encourages investment and demand for external finance.”

The survey document said the fiscal year 2019/20 started with the stabilisation program of the International Monetary Fund.

“The austerity measures and the SBP’s (State Bank of Pakistan) double digit rate hurt the investors’ confidence in the first quarter of FY2020,” it said. “After the initial dip, the KSE-100 index exhibited an upward trend as exchange rate stabilized and the economy was on a path to recovery. The index opened at 33,901.58 points on July 1st, reaching the year’s peak of 43,218.67 points on January 13th, 2020. However, as the COVID-19 was engulfing the world, capital began flowing out of the Pakistan’s stock market.”

Between February 26 – the date when first COVID-19 case was reported in Pakistan – and March 31, Pakistan’s KSE-100 index benchmark dived 23.75 percent and Rs1.582 trillion were wiped out of the market capitalisation.

Rupee depreciated by eight percent against a strengthened dollar between Feb 26 and Mar 31, which severely constrained the spending power. However, in late March, government announced a fiscal stimulus package of Rs1.24 trillion and the SBP cut the policy rate by 425 basis points to 9 percent to make up for the projected loss.

On April 30, 2020, KSE-100 closed at 34,111.64, (up 16.7 percent since March 31st) and market capitalisation closed at Rs6.376 trillion, gaining Rs755.77 billion since March 31. The KSE-100 index exhibited a modest growth of 0.61 percent in the first 10 months, whereas market capitalisation lost Rs510.58 billion during the Jul-April FY2020 period. The low turnover in the first quarter of FY2020 and in February indicates. Investors were unwilling to put their money at risk by acquiring the shares of a company with low share turnover.

“Despite the double digit policy rate, the upward trajectory can be attributed to timely release of PSDP (public sector development program) funds, stable exchange rate; and improvement in macro indicators (trade balance, foreign direct investment, remittances),” said the document.

The total funds mobilised between July 2019 and March 2020 in the national stock exchange amounted to Rs250 billion, as compared to Rs22.4 billion in the corresponding period last year.

The significant difference is due to debt amount issued, which is Rs230.6 billion during July-March FY2020 period as compared to Rs14 billion in the same period in FY2019. Around $ 130 million worth of securities were offloaded by foreign investors which were absorbed by domestic investors.

The average daily trading value (T+2)2 from July 2019-March 2020 was Rs7.13 billion and the average daily turnover was 194.08 million shares. The average daily trading value in futures was Rs3.4 billion and the trading volume was 87.01 million shares. No new company was listed with the PSX during July-March 2019/20, as compared to two companies in the FY2019. “It implies that companies didn’t want to take a risk by issuing an IPO3 during uncertain economic times.”