ISLAMABAD, 6 October 2003 — The fall and fall of the Pakistani stock market comes as a shocker to investors, belying the chorus of tall claims by brokers, dealers and analysts. They were refusing to come down on earth even as late as a fortnight ago.
But, the inevitable has happened. The benchmark Karachi Stock Exchange KSE-100 crashed down from the giddy height of 4,604.02 points on Sept. 12 to 4,178.94 points on Oct. 2. But, while the weaknesses of the stock market were visible to the more hard- nosed analysts, the vested interest kept on promising -and dreaming - that from 4,000 the KSE-100 is poised to crash through to the never-never 5,000 points. While the insider traders got out quite a bit before the final crash, who burnt his fingers? These are mainly small, uninitiated investors, and the expats. One of the principal villains was the speculation funded by Carry Over Transactions (COT), or ‘badla’ that provides short- term credit at high lending rates. The moment the COT-fund providers call up cash, there is always a general panic. People who had borrowed cash and invested in shares, start selling in panic to square their debts, in a market where there are more sellers than buyers, the market falls, and the index declines.
While this is the destiny of small and the unsuspecting investors, no effective mechanism has yet been found by the government’s stock market regulator -Security and Exchange Commission of Pakistan (SECP) - to protect small savers. What was going on in the market for months, kept the SECP bosses completely mum. The only word of wisdom that came out of the SECP was a statement of “caution.” The other cautionary statement was made by KSE Managing Director Moeen Fudda, who warned that the market was overheated and investment going even into second tier shares, at high prices. The fact, by now is, that a good deal of money has gone not only into the second, but even in the third-tier stocks. What is the prospects of yield from them, or retrieving the original investment money? No one knows. But, as of now, the self-congratulatory euphoria is evaporating.
The crux and curse of the market is: The supply-and-demand equation. There simply are no new scrips available for years. No new industries, businesses or companies have been established or their shares floated for years. The investors have an enormous amount of cash in hands. The banks, stuck with piles of cash, and no takers even at the lowest interest rates in Pakistan’s history, have started advancing credit to anyone who cares, and part of that money went into stock market speculation.
Now for nearly two years, and adding to these piles of money and nowhere to invest, the overseas Pakistanis, particularly those working in the Gulf, Saudi Arabia, Middle East and North America, started remitting home record amounts of forex, in the wake of 9/11, the US-led monitoring of bank accounts and cash flows across the international borders. A good deal of this expat cash went into stocks, besides pushing the real estate prices sky high. The real estates prices, however, started calming down in posh areas of Karachi. Its now followed by cracks in the stock market.
How did KSE-100 move over the last three weeks? After speculatively speeding through 4,000 points, it went on rising to 4,459 on Sept. 8. It eased to 4,546 on Sept. 9. But the stock maintained, what marketeers described as “ general forward thrust” because of heavy buying by financial institutions and “the punters,” in the pivotals and second-tier scrips. Several analysts started claiming “the bullish rally has come to stay.”
The bull run on Sept. 12 broke the 4,600 barrier, closing at 4,604.2 - the career best of Karachi Stock Exchange - as a result of “the exuberant mood”, anticipating important dividend announcements. The day had, in fact, seen index race upto 4,632, following big demand for pivotals, but later eased to 4,604.02, because of late selling in the session, of key scrips of Pakistan Telecom (PCTL) and HUBCO.
Equity funding to speculators and weak stock holders hit a life-time high of Rs.24.6 billion on Sept. 13. The COT market in that point of time, was again indicating signs of “concern” as one analyst said, because of its high volume and high lending rates. At one point, because of the high amount of COT funding, there were no lenders, but prospective borrowers were there in the market. However, the weighted average COT rates declined to 12.8 percent on Sept. 19, down from 18.2 percent on Sept. 12. COT rates on Sept. 27 seemed to stabilize at 12.13 percent when the financing demand declined. It followed nearly persistent two-week decline in the stock market that was calculated at 441 points, or 9.6 percent of the market, on Sept. 26. The overall COT financing that day was Rs.17.7 billion, down from Rs.20.9 billion a week earlier. The volume of COT-funded shares on Sept. 26 was 397 million shares, down from 433 million a week earlier.
Over eight weeks, KSE index rose 1,200 , or 33 percent. But, most analysts say the market needed a correction. The government claims the economy is doing fine. Major corporates are announcing good dividends. A 10 percent plus return on stock investment will continue to attract the investors. That is the projection about the few, blue chips. But what will be the fate of investors in the secondary and tertiary shares? These are the categories, attracting investment in the last several months because of blue chips are not available at affordable prices. Will that burn the investors’ fingers still more, as has happened in the last three weeks or so?
Key financial investors, for days, have generally remained absent from the field. The speculator and retailers were involved in alternate rounds of buying and selling. No one was taking long positions, indicating that uncertainty and fears of the market going down.