Picking stocks in this day and age is not everyone’s cup of tea. So, while picking stocks, one should follow both the top-down approach and the bottom-up approach for stock selection. In the top-down approach, we analyse the economy as a whole—beginning from the macroeconomy and descending to the microeconomy. In the bottom-up approach, we analyse different sectors and the stocks within them.

For instance, when beginning equity investment research, the most relevant period would be from 1929, the year of the Great Depression, to 2008, the Great Recession. Ten per cent drops do happen often, but not every single year. Some years have none; others have multiple. Thirty per cent drops are much less frequent and do not occur reliably every five years. Fifty per cent drops are very rare (think major global crises). The 2008 financial crisis saw markets drop by approximately 50 per cent. The dot-com bubble also caused large declines. The COVID-19 market crash led to a rapid drop of around 30 per cent—but recovered quickly.

So, the last time the market hit rock bottom was in 2008–09. When the market peaked at 52,000 points in 2017 and fell to 27,000 points, it declined by approximately 50 per cent from the peak, which is how we identify market tops and bottoms, considering that this was at or near rock bottom and the only way forward was upwards.

The second approach would be to analyse countries and their economies—economic indicators, of course, but not in isolation. Geopolitics, domestic politics and political economy collectively form a compelling case for investment. Coming to sectoral analysis, if we were to examine agricultural stocks, a useful way to value them would be to note that livestock is one of the sectors that has made the most progress in Pakistan in recent years and has consistently performed better year on year compared to cash crops, which have experienced volatility as well as an overall decline.

If you look at the concept of soft power from an anthropological perspective, the soft power of a country is driven by its cultural influence in the global economy and commands a much higher price-to-earnings ratio. For instance, the economy of the USA would fetch a higher price-to-earnings ratio and a better-performing stock exchange compared to a country that has little to no soft power. This is one of the factors through which countries like South Korea have established themselves in fields such as the fashion industry; consequently, South Korea now commands much greater soft power than it did in the past. Such soft power facilitates tourism, business-related travel, and higher business confidence. KSA Tadawul and the UAE are examples of markets that have built soft power in recent years.

Policies that encourage diversity of thought and demographic diversity, along with tolerance and harmony, collectively shape a country’s economy. The stock market, in turn, is a barometer of the direction in which that economy is heading.

For instance, if we consider the global economy over the past 150 years, it has been hegemonic. We were under a unipolar world order, which is no longer the case, as every country now has its own ambitions. Some seek to strengthen their economies, while others aim to expand their geopolitical influence. The idea of nation-states, constructed over the past 100 to 150 years, is now under strain. Therefore, it is more important than ever to consider the trajectory of currency markets, as subservience to a unipolar world order is a thing of the past—easier said than done.

Going forward, in the current scenario, a reasonable investment case would be against equities, as they may not be the most suitable place to park wealth. However, the energy sector is poised to outperform others and can be considered a relatively safer option. For instance, oil and energy sector stocks could be strong picks, given that the blockage of the Strait of Hormuz has catalysed an increase in oil prices, which analysts expect would hover around 200 dollars a barrel in the near future.

The concept of cross-border transactions is more complicated than ever due to the emergence of a rival currency in the form of the Chinese yuan, which now directly challenges the petrodollar that has been in place for the past 55 years.

Muhammad Shajee Suhail FarooquiThe writer is a LUMS graduate and a Capital Markets professional with 6 years of experience. He can be reached at shajeesuhail1@gmail.com

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