For a country like Pakistan, it’s amazing to see its stock market declared the best In Asia and the fifth best in the world in 2016 In a country where almost every, institution has its own set of flaws and problems, one cannot expect the stock market to be any different. The stock market, perhaps is the easiest way for some elite groups or politicians to get rich. They accomplish this by appointing handpicked heads of institutions who help them in carrying out big scale crimes like money laundering, corruption etc. No better example can be given for this other than that of Zafar Hijazi. Mr. Hijazi, who was appointed Chairman SECP by Ex-Prime minister Nawaz Sharif, was caught in tampering records of companies owned by the Sharif family. He was sent by the authorities to Adiala jail, only to be bailed out a few days later. Incidents like these really take their toll on the market. It was only after Ex PM was forced to step down that the stock market broke free from a string of consecutive losses.
“Pakistan with a 4.7 96 growth rate beats both of its neighbors’ stock market despite both countries economic indicators outperforming those of Pakistan.”
However, with an annual return of 45 %should we be proud? In general, it is believed that fundamentals drive the markets and prices just follow their own random paths. Academically, fundamentals are all the news and updates about a specific company, which in essence is believed to be the sole driver of stock prices. It is a general belief that it is not possible to deliver high returns consistently with public information, to which everyone has access to. Yet the Pakistan stock market (PSX) defies this and delivers noticeable profits. This high return does come at a risk, and risk is what drives foreign investors away Market analysts have long regarded Pakistan stock market as a high-risk market. Its volatility is much higher than that of other countries It is generally famous for circulating wealth in a few hands.
This brings us to speculate if these few wealthy individuals have a major say in a stock market of a country of 200 million people. On several occasions, government officials use the stock market to boast of the country’s economic progress the truth however is far from it How many companies have gone public since last year? How many people are now trying to save their returns? Stock valuation is a lengthy process and many factors are taken into account along with some technical including the ‘ dividend-discount’ model. Coming to the P/E ratio, it is difficult to get growth opportunities for several companies as most of them are never mentored or guided properly. It is completely wrong to assume that if Alibaba has a P/E ratio of 52 so tech companies in Pakistan should also have a P/E ratio of 52.
The government will keep doing what it usually does in its defense, that is coming up with an argument that Pakistan’s economic landscape is improving like no other which Is reflected in its ratings Good, but we should not forget that not so long-ago companies like Enron and AIG had a AAA rating one day before default. In essence to solely rely on ratings for stock market success and that too in a country like Pakistan is too much to ask for.