Keeping aside last Friday’s relief rally, the first four days of the trading week witnessed a selling spree that eroded a staggering 3,058 points or 6.7 per cent from the index, showing the highest four-day loss since March 18, 2020 when the lockdowns were first clamped to stem the spread of Covid-19.

Analysts and major market participants who were in truth unable to defend or define the bloodbath mumbled that it was all due to higher inflation, political uncertainty, rise in Covid-19 cases and so on.

Last Thursday, while foreign and local institutional investors took fresh positions, individuals (read leveraged investors) sold stocks worth a staggering $9 million. They chose to close their positions at market rates (lowest in the week) rather than meet the margin requirements.

They were mainly the holders of pumped-up shares like TRG, priced at Rs146 from Rs12.87 a year ago on March 25, and Netsol Technologies worth Rs286, up from Rs27 a year ago. There were many other baits like Avanceon Ltd, Systems Ltd, Ghandhara Industries and National Refinery.

The small unsuspecting investor who ventured into the market to make a fortune lost all their savings and departed beaten and bruised

In the four trading days, the plunge in stock prices was unbelievable: Netsol lost Rs42 or 15pc, TRG dipped Rs26 or 15pc, National Refinery was down Rs41or 6pc, Ghandhara Industries lost Rs60 or 21pc and Systems Ltd declined Rs54 or 11pc. As is always the case, the small unsuspecting investor who ventured into the market to make a fortune lost all their savings and departed beaten and bruised.

The few and feeble noises beseeching the Securities and Exchange Commission of Pakistan (SECP) to look into the massive fall in just four days have already died down after the market staged a spectacular rally last Friday by recovering 1,008 points or 2.36pc.

Regarding the small investor who went back home penniless, a major market player said that the rule of caveat emptor (buyer beware) prevails. The greedy speculators bit more than they could chew and became a victim of the cold and cruel world of finance.

But what made the market change its mind on the last trading day? Some tweets from influential people who are known to have the prime minister’s ear called for a probe. This might have done the trick. The entry of the bull last Friday was as dramatic as the earlier unexpected prowl of the bear.

Sources in the market, including a major broker, said the withdrawal of tax exemptions, reported to have been approved by the federal cabinet to raise additional Rs100-150 billion, was at the heart of the market meltdown in recent days.

However, a clarification that emerged on March 12 (Friday) regarding those tax exemptions that would now be presented in the National Assembly for approval provided relief to the panicky investors. A major clause purported to be in the proposed bill related to the withdrawal of tax exemptions on mutual funds, which would have removed their pass-through status, subjecting funds to tax even when they distribute 90pc of their profit to certificate holders. “The amendments that came to light on Friday in the first half showed no change in the tax exemptions status of mutual funds while other amendments also seemed to have minimal impact on corporate profitability, which triggered the bull run,” said a market strategist.

Mohammad Shoaib, CEO of Al Meezan Investment Management, said the leveraged players are first to take the blow when the market comes under selling pressure as they have to unwind their positions.

He reckoned that the current leverage position was heavy, including that of margin trading system, ready futures and CFS combined. “The higher the leverage, the greater will be the volatility in the market,” he said. Mr Shoaib concurred that the market chatter about the proposed withdrawal of tax exemptions to mutual funds had dented investor sentiments.

The clarity that emerged on March 12 that such was not the case and the tax status of mutual funds remained unchanged was a relief for investors and certificate-holders. Mutual funds have skipped out of equities in recent days. They stand out as one of the largest sellers.

Mr Shoaib said 80-90pc of the cash that flows out of equities goes into other asset classes — such as fixed income funds, money market funds, balanced funds and income funds — within the same asset management company without any additional cost. He said higher inflation and the last week’s increase in the interest rates of six-month and one-year treasury bills suggested that a hike in the benchmark interest rate was on the cards.

But growth in the sales of interest-rate sensitive sectors, like cement, oil, petroleum products and steel, will provide immunity against the slight hike in the interest rate, he said.

Raza Jafri, who is head of equities at Intermarket Securities, said the interest rates may become ‘normalised’ due to higher inflation going forward. Investors could move from cyclicals to banks, the latter having underperformed in the last year and a half.

If commodity prices go up, higher interest rates will be healthy for banks and oil, two sectors that have 40pc weight in the index, he said.

“If the policy rate, which currently is 7pc, remains in single digits, it will not dent corporate profitability,” he said. The market has already priced in a 1-1.5pc hike in interest rates. Mr Jafri said he believed cements still had value and so did the banks. The textile sector also has potential due to the government’s supportive policies, he added.

Published in Dawn, The Business and Finance Weekly, , March 15th, 2021