Just as Brexit is an excellent example of how politics trumps economics, the reaction to Brexit at Pakistan Stock Exchange (PSX) is a good example of how emotions oft trump reason.
Friday’s fall at benchmark PSX may be a huge 848 points. But it is still small in percentage terms (-2.2%); surely this market has seen the worst. What happened was no more than a knee jerk reaction as global equities and commodities were down after capital flew to safer haven like yen and gold.
But think of it this way. Markets had priced-in a Bremen because betting odds were about 75 percent in favour, and the weight of money was with those odds. With the Bremen being trumped by a surprise Brexit, the betting books had to be squared. Quite naturally, therefore, stocks and commodities had to take a hit.
That is not to say that global markets are necessarily overreacting; surely the economic consequences of Brexit are expected to lie in the negative-to-uncertain range – and both are pernicious for markets. But the point is that one has to be cognizant of the possible squaring of betting books that may have also contributed to the knee jerk reaction.
What will probably keep markets jittery in the near to medium term is how Brexit will impact the EU. Just hours after UK’s referendum results were announced, far right parties in France, Netherlands and Italy said they wanted a similar referendum.
It’s pre-mature to say where the camel will eventually sit, but the whole thing will likely keep the analyst community busy and the markets bonkers in the near to medium term. And if and when these countries actually leave the EU, then that would be a major game-changing event, the impact of which lies in the great unknown, which is not something that markets typically like.
But these are beyond-the-horizon questions, something which should not cause worries here at home, at least not for now. As far as local brokerage community is concerned, there seems to be a consensus: The Brexit-triggered slide at the PSX is “unjustifiable” and should be taken as a buying opportunity in light of the MSCI and CPEC theme. This column agrees with that view.
There are some concerns over how Brexit – amid fears of existential threat to EU itself – could hamper textile exports to the UK and the EU. The concerns are well grounded because Euro’s depreciation against the USD could potentially hurt Pakistan’s exports to the region. Likewise, the strengthening of Yen against the USD would not fare well with local automakers.
However, the impact of these on KSE-100 should be limited. Case in point: textile exports in 11MFY16 are down 7 percent, but the KSE-100 is up 8.7 percent. This is similar to last year. FY15 saw total textile exports fall 1.7 percent with a major decline in cotton cloth and lackluster growth in value added items. Yet the stock market grew about 16 percent in FY15. Likewise, the weakness in autos hasn’t kept the index from exploring new highs (see graph).
In other words, as the Second World War British motivational poster said: keep calm and carry on! Once knee-jerk reactions are over, the hunt for good values and good yields will eventually bring back Anglo-Saxon investors to this part of the world.
