For the first time in nearly a decade Pakistani stocks are at the heart of all investment activity. The Karachi Stock Exchange (KSE) index of 100 shares has climbed as much as 70 per cent since January. In a year when stock markets all across the world have been tumbling— between 10 per cent (Singapore and India) to 15 per cent (US’s Dow Jones) and 23 per cent (UK’s-FTSE).The KSE stands alone as the “best performing market”.

Having added 880 points in ten months, the Index broke the barrier of 2,200 points last Friday. Equities are still climbing, which is why many brokers are passing around the word that the index will fly past the eight-year-old (March 22, 1994) historic 2661 points mark. One could take a stockbroker’s word with a pinch of salt, for the man’s livelihood depends on selling optimism. But there are issues about the current rally that sets it apart from the previous such false upheavals. Unlike most of the previous rallies, there is a certain rhythm in the rise of stock prices this time. No, sudden jerks of 100-120 points at a time, but slow and consistent increase of 20-25 points in one session, which means that if at all the current bullish fervour is madness, it surely isn’t without method.

Excess liquidity, most market pundits agree, is the fuel that is firing up the investors’ passion for stock buying. Since September 11, 2001, there has been a reverse flight of capital. Scared of its safety in foreign lands, expatriates are sending in tremendous sums of money; the current year’s target of a billion dollars of home remittances, has already been achieved. And where must all that money go? Giving out an average yield of between 12 to 30 per cent, stocks offer the most attractive option. Bank interest rates are at their lowest with most banks offering as little as 3-4 per cent on deposits and that too on the ‘minimum monthly balance’. Gold is never an investment of choice in times of peace and no one wants to lock funds in long-term real estate market. Stability of the Rupee has brought dollarization to an abrupt halt and holding greenback does not look like the best bet. So the stocks. And fundamentally, Pakistani shares are posting attractive valuations: average value per share stands at Rs 19.98; price/earning ratio is about 6.37; price/book value ratio: 1.35; earning per share: Rs 10.18 and the Return on Equity (RoE) works out to as high as 25 per cent. Analysts contend that no where in the world do companies with such high RoEs trade at such ridiculously low price/book value ratios.

And there are two other issues that separate the current bull run from the earlier ones: The great bull market of 1994 was precipitated by the foreign investors, who had put in nearly a billion dollars in Pakistani stocks; local investors followed latter, in their footprints. By contrast, domestic investors and institutions this year, are known to be making most of the purchases, with offshore investors still taking a dim view of the stocks. Secondly, unlike the past, investors are putting in their own cash, instead of taking leveraged positions, i.e buying through borrowed money or ‘badla’. Both those factors make the current stock market rise look more stable.

What else is there? A string of excellent corporate results. Surprisingly, almost all sectors are posting improved financial results this reporting season. Even the laggards such as the cement sector have done well; eighty per cent cement companies that have already unveiled results, posted net earnings of Rs 948 million, while the industry had returned devastating losses last year. Depressingly dull companies such as FFC Jordan and ICI have swung back to strong earnings growth. Problems with Wapda a nightmare of the past, Hubco—the most actively traded scrip— has begun to return consistent earnings and dividend. Results due next week are those from PSO and Shell—the oil marketing companies and both are expected to post excellent results for July-Sept 2002-03 (first quarter) on the back of increased margins, inventory gains and higher sales volume.

Market players insist that if the current privatisation is pursued in right earnest, it would keep sending positive signals to the stock market. Just this week, The Privatisation Commission (PC) put the hammer down on second lot of ICP Mutual Fund. The government also appointed financial advisor (FA) for the sale of Pakistan Petroleum Limited (PPL), asking the FA to study concept of divesting 5 per cent shares of PPL on the stock exchange to small investors. The government has been encouraged by the successful disinvestment of 15 per cent of National Bank of Pakistan through the stock exchange.The sale of Habib Bank, Oil and Gas Development Corporation (OGDC) and PSO are set for early next year. A seasoned analyst contends that a successful sale of PSO could be one big sentiment booster, which could send the KSE-100 index over the all-time high mark of 2,661 points,the PSO being Pakistan’s biggest company in terms of sales and a jewel in the Privatisation Commission’s crown, which is expected to fetch at least $500 million. And so, when everything seems to be going well to boost investors’ sentiments, India also contributed its bit by announcing troops withdrawal. “Political stability, continuity of economic policies and law and order are the three elements which would make the market perform, since the fundamentals of the economy are sound”, says Moin M. Fudda,the newly appointed managing director of the KSE. And Moin Fudda could be another positive for the market, for the man means business. Within 10 days of taking charge, the KSE MD announced implementation of the universally approved “undisclosed trading system”, on which the bourse had been stalling for no less than three years.

But for all those sentiment boosters, some of the stock strategists and market players, nonetheless, are concerned of ‘what lies beneath’. They say that the current high stock levels are ‘scary’. An analyst, who is advocating adoption of cautious approach, argues that in the short term, stocks tend to behave like commodities—so more demand means higher prices no matter what the environments are. These analysts contend that no one is really giving a serious thought to the possible “political environment”. What sort of government would be at the helm of affairs; would it see eye to eye with the West on war against terrorism; what would be its economic agenda; would it continue with the economic reforms agenda and the pace of privatisation? Since no one is quite sure, everything including the fate of the stock market, now depends on which way the cookie crumbles on the domestic political front.