Fault lines in Pakistan’s stock market
KARACHI, Jan 12: In a little over six years since the bull-run began at the Pakistani equity markets, the benchmark KSE 100-share index has experienced an incredible rise of 12,000 points from 1,273 in 2002 to 13,900 points in the current turbulent times.
Equity values have individually seen sharp rise in prices. There are more billionaires in the country today than ever before and a great majority of them have to thank the stock market for their fortune.
In the outgoing year, the market yielded a return of 40 per cent, considered to be 10 times more than the profit on money parked in the then thriving big banks. Pakistan’s bull market has seen 60 per cent average yearly growth in the last six years.
But for all that the stakeholders taking a plunge in the market ought to keep one eye on the fault lines, which could, if not taken care of, have the potential of transforming into outright fractures. The March 2005 stock crisis was a quake across one of those great fault lines.
KSE 100-SHARE INDEX REINS SUPREME DESPITE FLAWS: The market float-based KSE 30-share index was born on Sept 3, 2006, but it has failed to overshadow the KSE-100 index. Leaning on market capitalisation, the lopsidedness of the 100-share index has been all too obvious. Designed back in 1991, companies with very small number of shares in the market, such as those in the Oil and Gas have carried the heaviest weightage in the index.
Three or four major scrips marching together in the same direction out of the total 652 listed companies could set the trend of the market for the day.
The other more representative KSE 30-share index has failed to loosen the gripping power of the long held 100 index. As with the “KSE all share index and half a dozen other indices introduced by private parties, the KSE-30 is only rarely referred and investors’ gaze barely shifts from the KSE-100 index during trading.
SCARE OF FOREIGN INVESTORS MAKING DASH FOR THE DOOR: Foreign investors have over the years put money in the KSE for its stellar returns. With Dow Jones taking a sharp dip following the subprime mortgage debacle, overseas investors are moving back to equities in the US market. That being one of the reasons, it is not to diminish the impact of political disturbances that have hit the Pakistan equity markets.
One of the great scare of the equity investing community is the daily news of diminishing figures in the SBP’s Special Convertible Rupee Account (SCRA), representing foreign portfolio investment. But Etrat Rizvi, CEO at National Asset Management Company Limited says: “Investors must be made to learn that foreign portfolio investment is hot money. It flows out as quickly as it moves in”.
He also cautions that it needs to be investigated if all that is represented by SCRA amounts to genuine investment or is that the local investment routed through a third country to turn it sparkling white.
PROTECTION OF SMALL SHAREHOLDERS: After an initial recovery, on Friday, the KSE-100 index dipped by 168 points. Most analysts admit that the fall of the stocks had been accentuated by rumours. As many as four rumours were doing the round: That a bomb had been planted in the KSE building, hearing of which many investors took to their heals; that the SBP was about to raise discount rates; that the foreigners were throwing away oil stocks and that the President Musharraf had resigned. It was the third time in two months that the last of them had been successfully made to work.
Who would protect small investors from the shenanigans of rumour mongers, suspected to be unleashed by major players? Given the will perpetrators would be easy to trace. A market participant said that all that was required was to identify the buyers and sellers pre and post the spread of rumour.
Then there is the question of informed decision making. Many stocks priced at considerably higher than ‘fair price’ are picked up by small investors who later burn their fingers as happened in March 2006. It would be cruel to dismiss small investors and day-traders as “satta wallas’, because speculation — in measured quantity — is spice of stock trading. They give the market the high volumes, which it seeks.
The regulators refrain would be the rule of ‘caveat emptor’ (buyer beware), but there is great need to step up investor education so as to enable them to make informed decision. Why not launch what is called the “efficient market hypothesis?
LACK OF DEPTH: Only 14 new companies were listed at the KSE in 2007. The total number of companies quoted at the exchange is just about 652 with listed capital of Rs668 billion. As an analyst pointed out more companies were relegated to the ‘defaulters counter’ and dissolved as a result of mergers and acquisitions, then entered the market.
The stock prices have risen sharply so that the aggregate market prices of all shares have galloped to Rs4.3 trillion. There is not much room left and the market demonstrates a lot of insatiable appetite for fresh stocks.
The government — when ever one is able to take hold of affairs — should resume the privatisation process. Private companies should be given tax incentive so as to lure them to offer shares to the public, regardless of having to comply with the harsh provisions of ‘Code of corporate governance’.
REFORMS PROCESS: Demutualisation is around the corner, so say the regulators. But introduction of new products (options and derivatives); margin financing and others are on the list of second generation reforms. Abolishing the COT system of financing, before banks were prepared for margin financing was a dumb move and had to be retracted.
The long standing demand of the participants to remove the limit on maximum investment under COT remains only vaguely answered. The regulators need to pursue reforms process in right earnest.
In saying so, one is surely seized of the limitations of the regulators in staff capacity. But efforts must be redoubled to find right people for the right places, generally known to be lying vacant since ages.