The markets have shown remarkable resilience and an unexpected rebound in post September 2001 era

Jan 14 - 20, 2002

Even before September 11, 2001, KSE-100 index was touching 1200 lows with a forecast for a downward plunge to 1100 level. While the market declined, initially after the attack on World Trade Centre, it bounced back sharply. This was definitely not in keeping with normal market reaction to an ongoing political crisis in any country and certainly not Karachi Stock Exchange (KSE). Equities market in Pakistan have historically moved most sharply in reaction to political developments.

Analysts attribute this behaviour to a number of factors, the top most being, investors have learnt that they have to live, work, invest, earn and spend in Pakistan. The clouds of war are progressively clearing in the backdrop of hectic diplomatic moves to keep cool both the countries having nuclear arsenal at their disposal. Saying this much, it is necessary to add that investors have learnt to work within the framework of typical Indo-Pak psyche.

Though, there are signs of upward movement of KSE-100 index, it is also necessary to bring to the attention of regulators that they should work more vigilantly. There are apprehensions that some market manipulators have once again become active. Investors are anxiously awaiting the report of the committee appointed by the Securities and Exchange Commission of Pakistan to investigate HUBCO dividend fiasco.

The next upward spurt in the market will come from possibly from two factors: 1) corporate earnings potential and 2) entry of foreign investors. There are divergent views about corporate earnings. While some analysts forecast that earnings will remain under pressure, others strongly believe that earnings will improve. Now investors have a larger number of scrips available to build up their portfolio but they should not be carried away by the psyche of day players.

There are signs of sporadic buying by foreign fund managers. However, it should also be kept in mind that these investors pick up a few scrips only. They pick up only those scrips which have large float, offer attractive dividend yield and higher probability of making capital gains. At the same time it must be kept in mind that these fund managers are struggling with their portfolios in other markets and do not necessarily have the funds to deploy even if Pakistani companies offer relatively attractive investment propositions.

Securities at CDS

It is necessary to mention that virtually all the securities have been declared 'eligible' at Central Depository System (CDS) only half are 'live'. While all the 41 companies listed under investment companies/ securities companies/banks are live, only 35 out of 287 listed belonging to textile sector are live. Most surprising fact is that HUBCO, having a paid-up capital of over Rs 11.57 billion and also the largest share in daily trading volume, is not among the top 15 securities in terms of percentage of shares available at the CDD.

Investors should focus their attention to domestic developments which hint towards an rebound of the market, after what has seemed an eternity of inactivity. The positive developments are: Pakistan has successfully concluded the PRGF and reprofiling of its external debt and enhanced GoP spending on developmental projects. On the corporate front, textiles, consumer goods and cement manufacturing sectors are expected to witness improvement in earnings at the back of higher sales volume.

According to Aqib Elahi Mehboob of KASB, "The most important to keep in mind is that investing in any emerging market, particularly Pakistan, has event risk. The risk is often visible but rarely predictable. Therefore, fence-sitting in such a scenario is not the optimal strategy. Therefore, it is imperative that investor/asset manager come to a decision regarding whether or not he/she has appetite for such an event risk and act accordingly."

As stated earlier the quantum of investment in equities will depend largely on issues like corporate governance and GoP policies. The GoP has to demonstrate that it is serious in attracting investment. This message cannot be passed on to investors by making tall claims. Investors only believe in seeing. Unfortunately, the economic managers have not been able to convey this. It still takes long times to bring an issue to the notice of decision makers and even longer to get it resolved.

Saying this much, it is also imperative that investors should also improve their mind set. They often complaint about what they do not get, but hardly acknowledge what they have. They must also realize that days of concessional financing, protection through higher import tariffs and area and industry specific incentives are no longer available. They have to come up with economically viable projects, acquire funds at competitive rates and manage their business prudently to be competitive in the global markets.