Dip in the KSE

If the stock market is to be taken as an indicator for political preferences, then the over 2,000 point dip in the KSE-100 index seems to suggest that investors are worried about the current political crisis surrounding Prime Minister Nawaz Sharif. Most stocks hit the maximum ceiling for a dip in their prices. A sudden five percent dip in what has been said to be one of the best performing stock exchanges in Asia reveals the fundamental instability underlying stock trade. Stock exchange performance can barely be taken as an indicator of economic performance and future growth potential. The 46 percent increase in stock prices in 2016 never corresponded to actual economic growth, which hovered around five percent. Logically, there is little reason for the overall stock index to rise beyond a rational maximum that corresponds to economic growth. Similarly, there is little reason for it to dip like it did on Tuesday when it gained 2.3 percent      on Monday     after the SC decided not to take an immediate decision on the PM’s future. Economic futures are not determined on a day-to-day basis, which is what the stock market is supposed to be an assessment of. But the boom-and-bust model preferred by stockbrokers is what allows high profits to be made trading stocks.

This is why falls like the one on Tuesday, while expected, show the need for serious reform of stock market operations. While it is still possible that the stock index might cross the 56,000 points many expect, it is currently hovering closer to 46,000 points. This is not the first dip this month either. Already, Pakistan’s entry into the Emerging Markets Index has created a more uncertain climate for stock investors. But the fall       on Tuesday        was a unique event. The last time the index fell over 4 percent was in August 2015 when China devalued the yuan. We have come to expect that the effects of political instability on the Pakistani economy will be felt first by stock exchanges. However, it is probably better to take such a fall with a pinch of salt. This does not have to mean anything more substantive than some powerful investors and stockbrokers choosing this moment to depreciate the market. The problem is the boom and bust model, which has been a constant feature of the PSX. While we can be sure that political instability will cause a further dip in stock values,      it will make a comeback in better times. A dip of almost five percent, however, should be monitored more closely. Such a strong ripple makes it hard to repair the image of a stock exchange.