Strait of Hormuz War & PSX Performance

31st August – The US carried out attacks on an island within the Strait of Hormuz which now is going to push this war into its 8th month and no solution on the horizon as the US refuses to entertain diplomatic overtures. Generally, war is not good for the economy, especially and economy that is so import dependent, has weak capital flow regulations, and various structural issues. This was exposed quite drastically on the first trading day after the war started with the KSE100 saw a drop of more than 16k points.

16K

Drop in KSE100 the first day of trading after the war began.

However, things are not linear – comparing the equities that traded the day before the war and on August 21, 64% of the equities have increased in value, with only 154 decreasing. The distribution mapped against the market size of the equities shows a clear positive skewness with quite a few observations above two to three standard deviations.

Another interesting observation is in comparing KSE100 to KSE100PR which indicates that the price return has been muted with a weighted perspective, but headline equities are making good profits which are being reflected in reinvested dividends on the KSE100. However, the benchmark index is not reflecting the value changes that are happening in smaller market capitalization stocks.

To make our analysis more applicable and accurate we normalized the data to only include equities that had an average volume of more than 10k for the 121 trading days that cover this period - the main criteria being that we want to study liquid enough securities that retail investors could partake and invest in. We mark this subset of the data as 'liquid'.

The anomalous performance on the broad equities market is best described by viewing 'Not Liquid' distribution where the number of Small Cap stocks is less than Large Cap or Mid Cap!

The outperforming of equities is limited to market cap but also the GICS industry; the industries with more than double the stocks that are higher relative to those that are lower are from Industries that are more susceptible to economic shocks - with the exception on Insurance.