KARACHI: Share pri­ces dropped heavily on Tuesday, resulting in the second-biggest overnight fall in the 32-year history of the benchmark index.

As many as 94 shares of the KSE-100 index took a beating while the remaining six shares either advanced or closed flat. As a result, the KSE-100 index closed at 62,833 points after losing 2,371.64 points or 3.6 per cent from the preceding session.

Speaking to Dawn, Pak-Kuwait Investment Comp­any Head of Research Sam­i­­ullah Tariq said the sharp decline was because of profit-taking by investors who believed the market was heating up after a rapid gain of 25,000 points to the index in the last few months.

He said the market seems to be in the correct­ion territory, which usually means a loss of 5-20pc in the index value. A correction in a stock market typ­ically results in short-term damage but helps adj­ust the prices of overvalued shares in the long run.

Leveraged traders, peo­ple who’ve used borrowed funds to buy shares, liquidated their positions in large numbers on Tuesday and caused a downward spiral, he said.

Trade data showed individuals as a category of investors were the biggest sellers as they disposed of equities worth $6.6 million. Other major sellers were mutual funds ($4.1m) and brokers ($1.1m).

The categories of investors who bought up shares in large quantities were banks ($3.9m), foreign corporates ($3.5m), companies ($1.4m), overseas Pakistanis ($1.2m) and insurance firms ($1m).

Mr Tariq said up to 70pc participation within the “individuals” category usually originates from high-net-worth investors. Small-time retail investors constitute only a “small part” in the overall stock market, which usually has just about 20,000-odd active participants on any given day, he added.

A research note released by Topline Securities on Tuesday stated that leverage in the stock market has “substantially increased” to a two-year high of Rs40 billion at share financing rates of 30pc.

A heavily leveraged buying at such high rates ahead of the end of the year generated “margin calls” on Tuesday, said stock analyst Sunny Kumar while referring to the practice in which a broker demands that their client should quickly deposit further cash to cover any possible losses. Margin calls originate when the market value of the shares that a leveraged investor has used as collateral for loans has dropped to a level that’s insufficient to cover potential losses.

Arif Habib Ltd Head of Research Tahir Abbas told Dawn the correction was “due” given that the recent rise in the index was also quick. However, he insisted that the index will resume its upward trajectory sooner rather than later, given that foreign inflows continue unabated and stock valuations remain significantly lower than their historical averages.

“From the price-to-earnings multiple to dividend yields and the market capitalisation-to-GDP ratio, the market looks poised to go up,” he said.

The overall trading volume fell 20pc to 1.5bn shares. The traded value rose 18.3pc to Rs29bn.

Published in Dawn, December 20th, 2023