Everyone knows that when bad things happen in the world, one of the first things to tank is the stock market. A couple of weeks ago, the S&P 500 dropped nearly 150 points minutes after the Associated Press’s hacked Twitter account put out the false news of the White House being under attack.
That was just a terrorism hoax. Now imagine Karachi. The city is the murder capital of the world and its businesses routinely suffer from massive productivity dips due to terrorist attacks, strikes, gang violence and power shortages. So you would think the Karachi Stock Exchange should be in the toilet about 90% of the time right?
And yet the KSE somehow seems to perform extraordinarily well. Last year, it had returns of 49 percent, which made it one of the five best performing stock markets in the world. WTF right?
It’s a fact that often gets thrown about as a sure sign of Pakistanis’ resilience and economic chutzpah in the face of everything going to hell around them. And that’s true to an extent. But if you dig a little deeper, you’ll also find that some reasons for this head-scratching phenomenon are kinda messed up.
People aren’t freaked out by violence anymore
Depending on how you look at, it’s either really disturbing or encouraging to see that most Pakistanis have become kind of immune to horrible things happening around them. Of course you have to expect it, given that violence and crime is such a common everyday occurrence and we would never get anything done if we stopped to gasp, react and mourn every time we read the news. That’s only something normal countries get to do.
What this means is that consumer spending tends to stay relatively unaffected by crime and violence. Unlike the U.S where news of Obama’s reelection stupidly spikes things like the sale of guns, Pakistanis just keep spending how they’ve always spent regardless of local and world events. And in the last few years they’ve been spending a lot. Which means…
Average incomes are rising and consumer goods companies are doing well
Consumer spending in Pakistan on average has increased a whopping 26% annually for the past three years, compared to 7.7% for the whole of Asia. (according to Bloomberg.)
This means that people continue to spend on ordinary consumer items such as food and household supplies and the companies who make those products end up doing really well on the KSE. Engro Foods, which sells dairy products, climbed 243% last year and Unilever Pakistan (which makes food and personal care brands) jumped 81%. The 2010 floods meant massive reconstruction plans, so Lucky Cement, the country’s biggest producer posted record profits and climbed 99%.
The price of wheat, the countries biggest crop, surged last year, which means rural areas have a little more money. And remittances from overseas Pakistanis reached a record $1.4 billion last year. What this all means is that while we’re still a poor country, average citizens have more money to spend.
And now for the bad stuff…
The stock market is tiny and easily manipulated by corrupt businessmen.
The KSE is a tiny market, the total market cap (that is the total value of all the shares present on the exchange) is only about $42 billion, less than a tenth of the Bombay Stock Exchange ($1.2 trillion) and $16 trillion for the NYSE.
Only about a quarter of the shares listed are available for trading, out of which 30% is held by foreign funds. Since there are such few shares freely floating, small trades can make an outsized difference. Now like most things in Pakistan, the stock market is extremely unregulated. So insider trading and market manipulation is routine. All the Securities and Exchange Commission of Pakistan can do is levy tiny fines.
The head of the AKD Group, the country’s biggest brokerage, is of course Aqeel Dhedhi who has recently been accused of insider trading. Trouble is, someone with the clout of Dhedhi can pretty much do whatever he wants. Check out this gem reported at Reuters:
An SECP investigator accused traders, including Dhedhi’s brokerage, of buying shares in a state-run Sui Southern Gas Co before an official announcement allowing the company to raise its prices. In the weeks before Sui Southern’s announcement, the stock price jumped from 13.5 rupees to 20 rupees, its biggest hike in five years.
The National Accountability Bureau, the state-run anti-corruption agency, called it a case of insider trading. But the SECP said its own confidential investigation showed no evidence of fraud. The SECP whistleblower in the case has been suspended from her job for disclosing “confidential information”.
Oh and half of the SECP’s and KSE’s top management used to work for Dhedhi. And they aren’t in a rush to punish illegal profiting.
Imtiaz Haider, the SECP commissioner in charge of market regulation, acknowledged fines were largely symbolic. If they were too high, he said, brokers might not be willing to pay them. Contesting fines in the congested court system could take years.
“The purpose is more to name and shame,” Haider said in an interview. “It causes them reputational damage.”
Naqvi, the KSE head, acknowledged his priority has been to boost the market, not to crack down on it.
“My management style isn’t confrontational because I want to build confidence in the market,” he said.
The stocks market is filled with black money
In an effort to boost trading volumes on the KSE, last year President Zardari ordered authorities to allow investors to buy stocks without questioning their source of cash. The justification was this would bring more money into the tax net.
But really it’s a way for criminals and corrupt politicians to launder their money, making star investors out of everyone from political gangsters to the Taliban. The pool of funds available from turning black money into white is potentially huge, Pakistan’s black market size was estimated to be around $34 billion in 2010/2011. Reuters reports:
In one case shown to Reuters by a lawyer, a man invested $10m buying stocks in a single transaction. His address: a Karachi slum notorious for Taliban infiltration
So in conclusion, the reason the KSE is immune to terrorist attacks is because terrorists are its biggest investors.