FUNDAMENTALS VS. POLITICS

Unfolding of political scenario would continue to mar the performance of bourses

SHABBIR H. KAZMI
Nov 26 - Dec 02, 2007

Though the political scenario seems to be getting obvious the rift between President General Pervez Musharraf and ex-prime minister Benazir Bhutto continues to cast shadow on the equities market.

Since beginning of the current financial year political turmoil started gaining momentum and at times it looked that President Musharraf was standing on quick sands. Even his ardent supporter the US President, George Bush seemed distancing.

At times the loud and clear message being given to President Musharraf was his growing inability to put up appropriate resistance against the Islamic militants, needing support of an elected government to be headed by nobody else but Benazir Bhutto. The circumstantial evidence of US brokered deal was promulgation of National Reconciliation Ordinance paving way for her return to Pakistan after a self-imposed exile spread over eight years.

While political scenario kept on changing at unprecedented speed, the equities market weathered the storm. There were surges and often intraday movement of the KSE-100 index shattered investors' confidence. However, most of them were not deterred by the ups and downs because of sailing with the tide. They took advantage of selling at levels yielding profit and were prompt in buying when the values dipped to attractive levels.

The point of consolation was most of the economic fundamentals were intact. Investors were also confident that whatever political setup may emerge the economic policies of Musharraf-Shaukat duo will continue. When Benazir's uttering got too bitter the first impression was "it was a mallow drama' but gradually people got cautious.

In the mean time the massive outflow from Special Convertible Rupee Accounts (SCRAs) came as a hit below the belt. Initially, local investors absorbed whatever was for sale. However, the scar continued to bleed and local funding could not absorb the spillover. One such day was when the KSE-100 index registered a record decline of 635 points.

On other days investors, having capacity to take delivery and hold the investment for some time realized their initial mistake. Consolidation of positions by the big players also encouraged others to follow their foot prints. The KSE-100 index still witnesses sudden spikes but investors seem to be taking the challenge as an opportunity.

The KSE-100 index, after touching a record high of 14,909 points also plunged to 12,800 level. Since then, the recovery is evident and funds have also started pouring into SCRAs, indicating return of foreign funds. There are two opinions 1) that the index is being driven by foreign investors and 2) the share of foreign investors is small and incapable of driving market in any direction. However, the consensus is these investors hardly miss any opportunity of profit making. Since they mainly invest in blue of the blue chips the opportunity is always there to make quick buck.

Some of the analysts are of the opinion that institutional investors are also playing a major role in keeping the market liquid and the bandwagon is joined by the insurance companies. Since insurance companies follow Jan-Dec year they wish to make as much capital gains as possible. The exemption on capital gains is expected to expire with the end of financial year on 30th June 2008.

However, the overwhelming consensus is, "One need not fear end to this exemption. This has kept the local market vibrant and if the exemption is withdrawn the daily trading volume could shrink to the lowest, where the survival of brokerage house could also be at stake."

The propagators of exemption of capital gains say, "This exemption has kept the market lively. The day traders may not be paying tax on capital gains but contribute billions of rupees in the form of capital value tax. The government has received amounts, under this head, which are far above the initial estimates. Any attempt to withdraw this exemption would bring the daily trading volume to less than 25% of the present volume." They also say that the daily settlement through National Clearing Company is less than 5% of daily trading volume.

One of the missing impetuses in the coming months will be absence of privatization related stories. In the recent past IPOs and secondary offerings, including issue of GDRs has kept the market vibrant. Though, Privatization Commission has invited EoIs for the sale of Pakistan Machine Tool Factory and Hazara Phosphate Fertilizer, the growing consensus is that these transactions could not be completed over the next three months.

No other state owned entity would be listed or its shares would be offered to general public in next three months. Even the delay in issue of already planned GDRs is feared. Habaib Bank IPO created a history but delay in bringing the scrip on board and its price movement has caused displeasure among the small investors. Their dream of making a fortune has been shattered.

Contrary to the perception being created by the opposition, things are moving in the right direction at a faster pace. The Supreme Court has given judgment on the eligibility of General Musharraf's election for another term, the new COAS has been nominated and the date for the election of national and provincial assemblies has been announced. Politicians are also submitting their nomination papers.

The only fear is possible boycott of election by the opposition. Political pundits are of the view that none of the political parties could go to that extent but would continue to create as much noise as possible, which would not have much impact on equities market.