ISLAMABAD, 3 February 2003 — Pakistani bourses continue their see-saw, but the stock market generally has declined after speculation came to an end.
The benchmark Karachi Stock Exchange KSE-100 index on Jan. 30 was 22.1 points down to close at 2,649.06. As the bourses opened after the weekend, Monday, Jan. 27 saw the benchmark Karachi Stock Exchange KSE-100 index to inch up and close at 2,746.85. That was up 137.40 points or 5.27 percent compared to weekend close of 2,609.45 on Jan. 25. It was still way far down from 2,955.00 that the bourse saw two weeks ago. It was also below 2,795.03 — the high of the week that ended Jan. 25.
The index at 2,955.00 had led the speculators to claim the market will overshoot the never, never attained 3,000. But, that was not to be.
The reason: The excessively speculative operators over-extended themselves in an over-bought market. The nemesis followed. The brokers were unable to settle and deliver the traded stocks. By now, they have been curbed. The warning signals came from the stock market regulator, the Security and Exchange Commission of Pakistan (SECP) that curbed the speculation. It reduced the high-priced speculative financing of Carry Over Trade (COT) that had caused much trouble, as the bourses appeared to be shooting through the skies. It was not in line with the given realities of the Pakistani economy, nor had there been any significant improvement in the economic fundamentals.
Negative external factors and the banks’ default-like environment had previously brought the scrips down. But, these were not the factors influencing the bourses in the recent weeks.
Instead, it was an overbought market that triggered the decline this time. This is why the SECP also stepped in to enforce brokers’ capital adequacy requirements and exposure limits and indulged in business for which they lacked financial capacity.
Once again, it proves the point: While demand for scrips has been rising as against a limited supply of good scrips, the brokers and speculators behaved irresponsibly in order to make a quick buck.
Besides these problems, the fact remains that only about a dozen scrips are actively traded. Small investors who place their money for a short term often try to make a quick buck, and get out. It brings the bourses tumbling down, leading to widespread losses and general dismay for the business and the government’s economic managers.
Khalid A. Mirza, Chairman SECP, the man mainly responsible for crafting the new bourse regulations, says the commission is “vigilantly watching the market.” “SECP is happy to note that the new regulatory mechanism is working for minimizing systemic risks, other likely defaults, and malfunctioning.” “Bourses are 90 percent sentiment and only 10 percent economic fundamentals.
... No power on earth can stop such movements of the market as in the last week. It is a matter of satisfaction, there was no systemic risk. As a result of regulatory framework closer to international standards, the stock market in Pakistan is stable.
It is illustrated by its steady climb from 1,300 points to nearly 3,000 in a year. The onslaught of bears last week was the outcome of an overbought market. Market mechanism then came into play do to the correction,” says Mirza.
More realistic and cautious analysts had all along been warning the bourse operators to pause, to stay cool. But, the filmsy air of speculation had led to an environment of self-congratulation.
Since good scrips were not available as virtually no companies had been floated or listed on the bourses, huge amount of domestic rupee liquidity, plus large dollar inflows from Pakistani expatriates in the Gulf, Saudi Arabia, Middle East and North America, were going into the stock market. The economy was offering no other high-yielding investment channels, either.
The banks have moved the interest rates a bit down, but the business and industry is still waiting for the banks to prune the interest rates so that the cost of doing business, cost of long-term investment, and price they pay for borrowing working capital, comes down.
Moin M. Fudda, the KSE managing director says, during the last few days, “the market has changed direction from bullish to bearish when COT financing rates climbed, as new ‘unaware’ investors flocked into the market after realizing, in astonishment, the gains capitalized by investors who were in the market since the beginning of 2002.
