Nov 03 - 09, 2008

Listless trading at stock exchanges waiting funds promised by the government and removal of lower floor that was to be done in October end is affected by insipid confidence of investors whose bullish sentiments are today contingent upon unwrapping sequels of policies determining fate of capital markets in Pakistan. Arrival of funds aimed at to bail out capital markets from its present turmoil and defrosting lower floor that has been ceased to abate capital flight can only tell about solvency of brokerage houses in relation to payments to clients.

Although, there is no actual estimation available of liabilities brokers owe to their clients protagonists are putting them around as 'huge'. They believe withdrawal of floor would present a real picture and add "outstanding margins are sizeable and may surface liquidity crunch". Floor was to be removed by October end, but apparently due to delay in fund injection, the decision was postponed till unspecified date. Critics made brokerage houses responsible for resisting withdrawal because they would find them in hot waters after floor removal and incapable of returning clients margins they have used.

Whatever may be the reason, affects are detested by both retail and institutional investors as late lifting puts margins at risk, further solidifying distrusts in participants. Besides, it stops fair market forces to play at level field. Media have been reporting that despite inflow of foreign investment trading sessions are lacking lustre.

Security and Exchange Commission of Pakistan decided to insert Rs. 20 billion market stabilization fund in all three stock exchanges of the country. According to a report, the fund would be provided with Rs. 30 billion government guarantee to enable it to write put options on seven state owned entities including OGDCL, KAPCO, PPL, SSGCL, SNGPL, PSO, and NBP.

"I came to know that the fund has to be pumped before mid November, but received variable news about its size," comments Sadruddin Ali, chief operating officer AMZ Management when asked about overdue stabilization fund. "Government is waiting for IMF proceeds since it is running out of liquidity," he adds. The capital market bailout fund is to be generated through the help of different institutions, he said.

A veteran stock trader, Feisal Rahimtoola told this scribe that stabilization fund would leave a chasm in investment base of other institutions. He said that the government funding would be nothing but a shift of capital from one security to another i.e. from parallel economy to bourses, causing a wide gap to be filled. "This is like a vicious circle," warned Rahimtoola.

Funds to be injected in capital markets will go back in its parent system, argued Ali. For instance, if NBP deposits are integrated in the exchanges then put options would give it a profitable way back to the institution. "In this case only money from and within system will be utilized," he said.

In addition to government's intending funding to flabby exchanges, banks finances that have already been disbursed for buying of shares are converted to term financing facility for one year. Therefore, the facility strikes out occurrence of calls pulling capital from trading and now money keeps intact for a year in equity market. It was also decided that CFS removal would aggravate liquidity problem. However, these support services overlooked impending danger that may be ensued in case of Pakistan-IMF agreement that will stipulate discount rate rise among other conditions.

Compounded with liquidity shortage in the banking system, possible ramping discount rate would prove a last nail in the coffin of dejected borrowers, demagnetizing banks finances to shares trading repulsively. IMF possible restriction over lower interest rate will hamper growth of the economy in general and cash-strapped exchanges in particular.

Fear of discount rate rise is hurting confidence of both retail and institutional investors in capital markets. Investors are feeling reluctance about investing in equity market. Discount rate has snowball impact over stocks trading in all stock exchanges across the world. For example, cut in interest rate by US Federal Reserve has recently invited swarm of investments in shares trading and rephrased bullish sentiments in the Wall Streets.

Often, it is asked by experts that how once buoyant and healthy capital markets of Pakistan have recorded domino-downfall? They also put under doubt existence of genuine drivers of indices by pronouncing that markets could not tolerate financial shocks and were regularly required administrative vaccinations. Had unfair practices been restrained, intensity of jolts would have been slowed and the regulator should have resorted to administrative measures in piecemeal rather than in haste.

"Usually, stock exchanges exhibit buoyancy because flows of investments are dominantly directed towards them and other sectors need to endure diminishing effects subsequently, however, what happened in Pakistan was that capital markets and real estate were altogether propelled towards congruent progress, which was absolutely preposterous", explained Rahimtoola. Markets of property and stocks were manipulated on the basis of unfair play instead of genuine market forces.

It is to be seen if fund injection saves capital markets from being slid following removal of floor and whether hedge fund is generated without causing gap in capital base of other securities. Put option provides an opportunity to institutions to deliberate upon concentration of capital market stabilization funds. Liquidity shortage may limit exposures in unfolding market situation. Although default of brokerage houses on margins is not perceptible, the magnitude of liabilities is to say a final word, advised an analyst.