During the pandemic, the stock markets of developed countries have reported a jittery and borty trend. The current global economic hijacking has put the world on standstill. However, focuses on the impact of COVID‐19 on Pakistani stock market, which belongs to a developing economy.
The findings of current study have contradicted with the previous studies, which reported an adverse effect of COVID‐19 on developed stock markets. In contrary to the markets of developed countries, Pakistan’s stock exchange; KSE‐100 index has confirmed positive increment in stock returns. It seems clear that the timely intervention of Pakistani government has safeguarded the investors from utter disaster of stock market.
Due to the measures against the COVID-19 prevention, almost all the economies are now facing a drastic decline in economic activities, and the ratio of business failure increases. Small businesses are looking for bailout packages from the government and large businesses also facing difficult situations to retain their employees at the time of no economic activities. This decline in the economic activities affects the stock markets, commodity markets and reducing trade between countries.
Researchers argued that the stock markets are always affected by major events. However, as this virus becomes global pandemic, it starts affecting the businesses which is reflecting in world stock markets. The Hang Seng index and Shanghai stock exchange, United States and European stock markets reflect negative returns. In March, United States market hit by circuit brake mechanism, four times in 10 days. Similarly, United Kingdom stock market index, FTSE, has a decline of more than 12% worse after 1987.
In Pakistan, the first case of COVID‐19 was reported on February 26, 2020 which has crossed the figure of 13,000, till according the statistics. However, the recovery rate is better as compared to the developed countries, like Italy, France, and United States. The impact of this pandemic situation on Pakistan’s economy depends on the time taken in taking preventive measures and the intensity of spreading the disease.
According to the Asian Development Bank (ADB), this pandemic situation can cost the Pakistan economy approximately $16.38 million to $4.95 billion, nearly 1.57% of the overall GDP. The report also mentioned that this pandemic cost more than 946,000 job losses. In this way, a country that is at the recovery stage, in the last 2 years, is affecting badly.
Trade is considered as the backbone of every economy as it brings the foreign reserves in the country to support the balance of payment and control exchange rate, etc. After this pandemic hitting Pakistan, authorities decided to close the industry which caused to shrink the economy. Previously, the stock markets reflect the changes when a major event or problem hits the country. In the same way, as the infected cases reported in Pakistan, the stock market starts declining; on March 19, it hits its lowest value in the last 5 years.
Resultantly, the stock market has shown a declining trend in start of this uncertain situation. Later when IMF and other countries extend the dates of the loan payment, IMF approval of $1.4 billion grant to Pakistan to cope with this pandemic and the funding from the World Bank (WB), help indirectly to recover the stock market and business activities in the country. In turn of these efforts, the KSE‐100 index has shown a significant surge in, which KSE-100 moved from 39,382 to 44,960.
By using quantile‐on‐quantile statistical method, CERP examined the relationship between the spreading of COVID‐19 and KSE index in Pakistan. The trading has stopped in KSE due to sudden downfall in KSE‐100 index. It has been observed that the KSE index start declining which turn to its historic lowest point of the last 5 years. One of the reasons for such decline is the drawing of foreign investment; in the last 2 years, there were $3.5 billion of foreign portfolio investments in the stock market of Pakistan which started withdrawing. Resultantly, within 2 weeks, $2 billion has withdrawn from Pakistani stock market. At the same time, cases started increasing in Pakistan and at the end of November.
At the end of last month, the market starts recovering due to number of reasons: firstly, the decline in interest rate motivates the investors to turn back and invest in Pakistani economy. The significant reduction in interest rate boosts the investors’ confidence to take a loan and invest, which deliver a positive signal to investors. The second reason for increment in stock index is the economic package from the government of Pakistan to help the public and small businesses. The government has announced the economic package of Rs. 900 billion which is equal to $5.66 billion. From this package, the government has fixed Rs. 100 billion for exporters to enhance the exports and economic activity in the country. In turn of these significant and timely measures, the stock market is now booting up. The forecasted trend of KSE against COVID-19 pandemic is in three scenarios: low growth in cases, average growth in cases and high growth in recovery from the coronavirus.
In Pakistan, which is a developing country, the situation is opposite to the stock markets of developed countries, like Europe, United Kingdom and United States, where the stock index has hit hard. According to the predicted data by CERP, the KSE‐100 index started moving upward in August and September. The main cause for such surprising response of Karachi stock exchange are the economic support packages to industries, economic aid to general public to maintain their consumption of industrial goods and the increase in business activities due to the special month and the Muslim festival ahead. In this month economic activity remain more as compared to other months.
In a nutshell, the authorities have to foresee the COVID‐19 trend, stock market and economy, etc. to take preemptive measures on timely basis. In such scenarios, it is more than important to provide the economic relief to general public and business Diaspora. These economic packages help the local community to maintain their demand for industrial goods which trigger the economic activity and attract the investment opportunities.