ISLAMABAD, 17 February 2003 — The see-saw of Pakistani bourses seems to be over, and barring an Iraq war only moderate fluctuations are forecast for the near future. The bourses seem to be returning to their normal, pre-boom level. But investors may have to remember, with a tinge of sadness, a fall of 532 points within a matter of days.
The benchmark Karachi Stock Exchange KSE-100 that rose to 2,950 may not return to this all-time peak in the foreseeable future. The market is currently leveling out. KSE-100 was at 2,476.96 on Feb. 4 and was down to 2,418.05 on Feb. 10. That was the case when the market closed for long holidays. The turnover also had slid from Feb. 4 volume of 223.46 million to a mere 82.123 million shares on Feb. 10, as no buying interest was seen even though the prices were declining.
The overall market capitalization was down Rs.12.546 billion at Rs.536.959 billion as bluechip Pakistan Telecom, Hubco electricity and Pakistan State Oil sharply declined. These and other attractive scrips have declined to profitable levels, but there is hardly any takers. What will be the story today when the market reopens after the holidays? Analysts are not bullish at the moment.
Although stock brokers are citing the likely Iraq war and the India-Pakistan diplomatic tensions as the more immediate cause for the bourses’ decline, one wonders if it is all that true. As an analysis during the stock market boom of the last few weeks shows the real, and perhaps, the only reason simpler: Supply of good scrips is not keeping pace with the rising demand.
The demand, over months, has constantly gone up because: a) The commercial banks have piles of liquidity.
b) The state-owned and other financial institutions are not finding enough high-profit or high-yield investment channels.
c) Dollar inflows of home remittances sent by Pakistanis working in the Gulf, the Middle East and North America are constantly growing following stiffer, US-dictated monitoring of international financial transactions.
d) The real estate, a popular field for domestic and expatriate investors, is experiencing a rise in prices.
e) Profit rates on government-operated National Savings Schemes (NSS) have been cut further by an average 2.0 percent effective Jan. 1.
f) Commercial bank profit rates on savings deposits are down further to 3.5 to 4.0, and are still declining as a result of the easy money policy adopted by the State Bank of Pakistan (SBP), the central bank.
g) The SBP has slashed its benchmark discount rate to 7.5 percent — a signal to commercial banks to cut their lending rates to business and industry in order to reduce the cost of production and operations, so that domestic prices are reduced and exports kept on course to ensure that Pakistani goods are sold in larger volumes and on high unit prices in the global market place.
h) De-dollarization of the economy is taking place because people are converting their domestically-held dollars into rupee as value of the greenback is depreciating against the rupee.
i) “Reverse flight of capital” is taking place because those holding forex deposits abroad fear that their money may be caught up in US-monitoring of financial transactions, and for the reason that rupee is gaining in value while dollar is depreciating.
While the demand for stock market shares has been constantly going up, especially since 9/11, there has been hardly any fresh supplies of scrips. Over the last three years just less than half a dozen companies have been floated or listed on the stock exchanges, compared to 210 companies listed on bourses in three years prior to that. New industries and companies are just not being launched and no new shares are floated or offered. It means too much investment money chasing too few shares — and that too old ones. It led to spiraling of prices of old and blue-chip shares.
The recent boom was largely caused by borrowed money on the basis of Carry Over Transactions (COT) — locally called ‘badla’. Stock brokers arrange and borrow funds for investors to buy shares under this system. The cost of such borrowing during comparatively normal times moves around 10 to 12 percent. It shot up to nearly 50 percent during the peak of the recent boom. It was the cause and the effect of the boom and the bust. It funneled speculation and kept pushing prices to an unrealistic level. The stock brokers are once again being blamed for excessive and unethical speculation. While they were busy in self-congratulation, and giving investors, especially small investors, false hopes of making a big buck, the high cost of COT financing reached a totally unsustainable level.
Then the lenders, in most cases stock brokers themselves, started recalling their funds from the borrowers. The borrowers, finding no way to repay the credit, started selling their recently bought high-priced shares in panic, to repay the loans. The panic selling pricked the balloon and the stock market came down crashing.
While the boom was being fed by high-cost borrowed funds, financial experts and analysts kept on warning that the bourses are treading an unrealistic path, and flying too high. But, no one seemed to be listening. Fueled by false hopes floated by self-serving stock brokers, small investors were, supposedly, all set to make a big kill, and earn a quick big buck. Instead, they burnt their fingers, once again.
The reality, on the basis of which caution was being advised, was that there is no change in the fundamentals of the economy, nor new businesses were being launched, nor new shares floated.
The broker-speculation-fueled boom and COT dealings, is nothing new in the history of Pakistani bourses. “It is not a new thing at the Karachi Stock Exchange. Almost 75 percent of the previous crises were nothing but generated by these COT-providers — who first help grow the bubble and then pinch it with their cash calls,” says Arshad Arif, an analysts with Khadim Ali Shah Bukhari Company.
