Nov 03 - 09, 2008

Some analysts believe that removal or continuation of price floor may not change the future market outlook as it is chained by more than one negative economic factors and political instability linked to country risk factor. The market awaits clarity on foreign inflows or financial assistance from the International Monetary Fund, according to the local dealers. The foreign investors holding shares worth $1.5 billion have been demanding removal of floor and free movement. It is feared that flurry of sale orders would ground the market as soon as the floor is removed. Some analysts say that the floor has stifled trade and there is concern that if the floor is removed without a fund in place brokerage firms could default.

The floor mechanism set on share price of Pakistan main stock market could not be removed on Monday (October 27), as earlier decided, and the benchmark KSE100-share index ended flat at 9,182.88 on a record low turnover of just 1,800 shares. The floor will remain in place until the government funds and Put option mechanics requiring additional time are finalized, according to the decision taken on Sunday (October 26) by the Board of Directors of KSE. Adviser to Prime Minister on Finance Shaukat Tareen had earlier said that the Rs 20 billion open-end fund would provide soft landing to the market from October 27.

To avert a major fall in the stock market after the removal of floor, the government has announced Rs 20 billion ($250 million) market support fund along with government guarantee of Rs 30 billion ($370 million) to foreign portfolio investors. The fund will buy in seven government-owned companies having a weight of 30 percent in the KSE-100 Index. These companies include Oil & Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL), Pakistan State Oil (PSO), Sui Southern Gas Company (SSGC), Sui Northern Gas Company (SNGPL), Kot Addu Power Company (KAPCO) and National Bank of Pakistan (NBP). The government has also decided to guarantee A-rated Term Finance Certificates (TFCs) for a period of one year that would bring stability to the market by enhancing liquidity.

The floor was imposed on August 28 to protect share prices, but the market could not return to normal trading parameters due to Pakistan's deteriorating economic fundamentals and worsening law and order situation. After imposition of floor, the trading activities had reduced as the average ready market volume had declined to 0.187 million shares. The floor has eroded the trading interest, with investors unable to sell at prices that could attract buyers in the market. Floor freeze continued to dampen market sentiment, with investors remained pre-occupied in discussions for support measures and removal of the artificial floor. Analysts believe that the stock market deadlock may only ease if fresh funds could be injected not only into the stock market but the whole financial system.

The situation got aggravated on Friday (October 26), as the financiers declined to release fresh funds into the continuous funding system for badla market 'that lends money for stock investing'. This led the CFS dry of liquidity, as investment under CFS decreased to Rs 11.6 billion on Friday as compared to Rs 11.89 billion a week earlier, depicting massive 80 percent fall from Rs 57 billion that the market saw in November 2007. The dearth of funds also pulled up the CFS rates by another 62 bps to close at 60.05 percent. Owing to the unavailability of liquidity in the system, the stockbrokers had asked for a freeze under CFS rate at 24 per cent, or otherwise closure of the market till the floor was removed.

While local dealers fear that a number of brokerages may default if the removal of the floor is followed by a sharp fall, the foreign investors consider floor a huge risk and want to see the floor index removed and the stock exchange function as an open market. Some analysts believe that market could witness 10 to 15 percent fall after lifting of the floor, however with the activation of market support fund, it will consolidate gradually and could gain bullish momentum in the coming days.

The proposal of capping the KSE-100 index at 9,000 points came when the weak economic outlook and growing political chaos in the country drove the index on August 27 below 26 months' lows. The market however witnessed dull trading activity as the average daily volume of ready market declined to 17.467 million shares during the 20 trading days after placing the floor. The trading volume was much lower than 12-months average of 193 million shares during the period. The market witnessed lowest volume in last 10 years of 2.792 million shares on September 24.

Though the US-led global liquidly crisis caused world's major stock exchanges to decline, yet the price freeze did not affect the KSE-100 index. The foreign investors have not welcomed the price freeze mechanism, as it prevents the investors from moving in and out. The investors are also worried about the country's weak economic outlook with the weakening rupee, spiraling inflation at more than 25 percent and dwindling foreign exchange reserves. The rupee, from Rs60 level in the beginning of the year, has now weakened to its lowest level at Rs82 to a dollar in the open market. The massive erosion in the value of local currency against the dollar has also sent distress signals among the stock traders amid fears that its negative impact could also cause a major jolt to the share business. Foreign portfolio investment in July and August came to a net outflow of $110.9 million, compared with an outflow of $146.6 million in the same period last year. The removal of price floor is likely to cause more outflows from the equity market.

The KSE 100-share index is presently threatened to be removed from the emerging markets index of the benchmark Morgan Stanley Composite Index (MSCI), which is used by the fund managers and other investors to benchmark their investments. Only six months before, the KSE was rated as Asia's top performer by the MSCI. The removal of KSE-100 index (due to the imposition of price floor) from the MSCI emerging equities index can exclude companies or markets from capital flows due to fund regulations.

For the past five years, the KSE-100 index has been the best performing stock exchange in the Asia's emerging economies. Declared as the Asia's best performing market for the year 2002, the KSE-index has shed 34.7 percent since the beginning of this year. KSE-100 index rose to more than 112 percent in the year 2002 and turned the Asia's best performer followed by Sri Lanka, Thailand and Indonesia. Some analysts believe that as a result of February 18 polls the change of authority after eight years of high growth under former president Musharraf turned the best performing market into the worst, as the present coalition government failed to keep up the pace of growth. The foreign investors were expecting political stability after the February general election, but the country continued to witness political and economic uncertainty despite formation of a political government.