Is Pakistan’s war with Afghanistan and the US-Israel war against our next door neighbour Iran and its effects on the Middle East a good enough reason for the Pakistan Stock Exchange to declare force majeure?
On Monday, the first trading day since the war broke out on Saturday, the PSX witnessed a record fall of over 16,000 points. Since then, the market has recovered and closed at 161,210.68 points on Thursday,
But given the PSX’s elevated leverage and fragile holdings, continued trading under current ambiguity risks a disorderly KSE-100 free-fall. There should be Plan B for the market’s safety.A prudent step would be to suspend the market for two-three days to allow geo-political clarity, particularly as our war with Afghanistan; Iran’s with Israel and the US; and broader Middle East instability constitute a clear force majeure.
The closure must also prevent off-market trades and CDC movements, containing investor and institutional losses while averting cascading stress on NCCPL and banks. Risk managers of banks have limited understanding of the local capital market.
It is important for the authorities concerned to understand that intervention after liquidity evaporates is far costlier than a coordinated pre-emptive action by the regulators—the SECP, SBP and PSX. It should be led by the PSX and SECP.
Here are a few recommendations based on learnings from the past for frontline and APEX regulators. The authorities should halt trading (on/off market) completely and suspend CDC transfer activity as well until war-related uncertainty eases and some clarity is achieved, which may take 3-5 days at max; task economists with developing a risk metrics index encompassing war, geopolitical and macro scenarios to guide investors; reject rigid ‘no closure’ stances as they endanger local investors and systemic liquidity.
The fact is that there are ongoing two wars, a situation that will definitely induce panic among general investors, especially local weak investors as MTS and MFS levels are really high.The authorities should coordinate with the SBP/NCCPL to raise share-financing limits ahead of market reopening; take onboard MUFAP members and insurance companies having large investments in capital markets; suspend closing-price mechanisms tied to bids/offers, base them only on transactions above a defined threshold before market reopening.
The assumption here is that the clarity of scenarios will strengthen investor confidence. However, the authorities must not keep the market close for a long period and prepare a reopening plan/gears protocols for smooth operations.
In 2008, Pakistan was not directly engaged in conflict with Afghanistan. Iran, likewise, had not been attacked by Israel, and neither country was embroiled in direct war. The broader Middle East region was not experiencing the same heightened instability as seen in later years.
The primary issue during this period was the extended closure of the market. When trading eventually resumed, a floor was placed and circuit breakers were implemented to manage volatility. Banks withdrew share financing and revised limits downward, following the guidance of the State Bank of Pakistan (SBP) under the leadership of the late Dr Shamshad.
During this period, the authorities allowed off-market trades, and made adjustments to circuit breakers as well as the closing price mechanism for various scrips. Another significant concern was the preservation of US dollar reserves and the challenges posed by repatriation of funds. Crucially, there was a lack of clarity for participants, stemming from several factors. This uncertainty made it more difficult for investors to make informed decisions and compounded the overall sense of instability in the market.
Pakistan capital investors recently crossed the 500,000 mark, and, I believe, at least 50 per cent of them are individual and new investors. If they get wiped out, it will take another 10-15 years for the Pakistan capital market to increase the number of participants equivalent to Bangladesh or India, for example.
Before things go out of hand, regulators and senior participants are advised to consider the different aspects that could affect the market and take a decision for the protection of new retail investors and their confidence building and the development of the PSX investor base in Pakistan. Market closure is not unusual as many markets have already done it to protect their local and international investors until there is some clarity on any developing situation.
The writer is a senior executive with extensive experience at the C-suite level and an expert in GRACE (encompassing Governance, Risk, Compliance, Audit and Ethics). He has also previously served as a frontline regulator in the capital markets. The writer does not hold any long or short positions in the PSX.
