THE CAPITAL MARKET THROUGH 1997

During the past one year, Pakistan's capital markets have gone through more turmoil than ever before which proved to be a baptism by fire

Khurram Baig
Nov 03 - 09, 1997

A lot has happened in the stock market during the past year, and some even say that the market has also matured to a certain extent over this period. There have been several incredible rallies as well as equally dismal periods of bearishness. Apart from economic turmoil the stock market has had its fair share of controversies with defaults, power tussles and scandals.

It was just about this time last year that the PPP government was ousted from power by the President and a lot of reforms were taken by the interim government which included a number of long standing demands by the management of the local bourses. Then came the elections and Nawaz Sharif came to power with a historic mandate. This brought a surge of confidence among the business community as well as the general population of the country. It was assumed that Nawaz Sharif being a business friendly prime minister would take economically sound steps to put the country back on the path towards recovery and then the immense mandate that he had received sent the message that such a politically strong government would also prove to be stable and more confident in executing its policies.

The market saw an initial rally as it became evident that Nawaz would be the new premier and while the market steadied to a certain extent soon after the elections sentiments stayed very positive and upbeat right to the budget. Economic package after economic package was announced right until the budget and with general approval from the IMF despite a shift towards a supply side strategy the confidence among the general public increased.

This positive sentiment is still there to a certain extent but it does appear to be a little bruised and battered now. It has taken a tremendous beating at the hands of default fears, political tussles, economic setbacks and then of course issues within the market. In the past one year, at first glance one would think that the market has come a long way. Where the index was less than 1500 points at this time a year ago it is now in the region of 1900 points. But during this period there have been a lot of upheavals and down trends.

Defaults

For the first time in the history of the KSE have so many scandals and defaults emerged within such a short period of time and those too of such enormity that sentiments buckled. The first instance was that of Yousuf Ismail Nagaria's seat which was being used by his son Mohammad Ali Nagaria. He was found guilty of floating fake shares into the market worth more than Rs 40 million of Hub Power and ICI. It later transpired that he was merely a vehicle of his agent Yousuf Adhi but nevertheless, a default occurred, the card was forfeited and the market was shaken.

The next incident was much larger, involving a sum that is still not clear to this day. Faysal Jamal, the younger son of Rashid Jamal was the perpetrator this time and he defaulted to the tune of Rs 200 million in what he probably hoped would have been the biggest play of his life. He played big and lost big. Faysal's basic error was that he went blank in PTCL and a few other scrips and read the market totally wrong. It is a general rule that there is always a rally at the time of the budget and one should never go blank just before the budget. But what really hit him was that while most people expected a harsh budget with a subsequent bear run at the market, the budget was surprisingly positive and the market reacted as such.

Faysal was left with no option but to forfeit his fathers membership. The KSE chipped in as did a number of other members to try and help him out of the crisis and also to try and save others from going down but the default was simply too large.

Rallies

There were two major rallies during the year. One was just after the budget which took the market to almost 2100 points and sentiments were so high that many people believed the KSE would break the pervious record established in 1994. This rally appeared to be fueled by the start of the new fiscal year and the belief that foreign fund managers would come in with fresh funds. However, the market then saw extensive corrections but stayed in the 1800 point range. The second rally was in the month of October when the market again crossed the 2000 point mark on rumours that ESAF was just about in the basket and the correction had already begun when the crash came. All in all, the market this year has on average been much better than it was last year and the signs are encouraging.

The IMF

The relationship between Pakistan and the IMF during the year has also been a major factor in the market's behaviour this year. There have been constant fears of default as well as the fear that with Pakistan taking a supply side approach to solving its economic problems the IMF would back of and leave us in the lurch. However as we can see today, the government has managed to meet its commitments so far and has also convinced the IMF of its sincerity in solving the economic crisis such that we have also been able to get the all coveted ESAF. This is definitely not the end of the road but the start. Getting the IMF back into the game and on our side is just the start. The real task is now starting. Proving to the IMF as well as all the people that have reposed their confidence in the government that they were not wrong in doing so. The market has kept a close watch on this and has reacted quite positively to the latest commitment that the IMF has given, regarding ESAF.

The currency crisis

Perhaps the biggest incident that happened this year and effected markets all across the globe was the free float of the Thai baht on July 2. This precipitated a storm such that markets al overt the region took a hit and have fallen to historic lows. Currencies are at 20 year old parities to the dollar in many cases. This crisis has culminated in causing a global storm which has resulted in record falls at markets like the NYSE, the Hong Kong market and even as far as Australia. Markets all across the world including the top four exchanges of the world in New York, London, Tokyo and Hong Kong fell like a ton of bricks. Fortunes were lost overnight. However, Pakistan managed to keep its currency save from this crisis fro some time at least. Perhaps one reason for this was that Pakistan does not have too much trade with the Far eastern economies.

Devaluation

What at first appeared to be a blow below the belt by the government and one that sent the market into a gloomy spiral was the sudden and totally unexpected announcement of a 8.7 percent devaluation in the rupee after frequent and constant reassurance by the government that no devaluation would occur. It is surprising how this came to be. Most analysts, after the currency crisis in the region had been anticipating a devaluation of the rupee but the government kept insisting that there was no need for one. Exporters kept demanding a devaluation to bring the currency back to pervious levels with global currencies but the government was adamant. Finally on October 15, it was not the ministry of finance but the State Bank of Pakistan which announced the devaluation. And it took everyone by surprise. It was the same day that the PTCL results were announced and many brokers believe that devaluation saved he market from the negative effect of the less than satisfactory short term impact of PTC earnings. The market managed to overcome this also and once again rallied to over 2000 points.

Modernization

The market appears to have matured over the past year but the speculative presence in the market as well as the susceptibility to rumours is till a major deterrent to long term growth. At the same with major developments like the CDC and the KATS a lot of analysts believe that the local market is now well equipped to attract investment on a larger scale. But what we really need to change is the attitude of the local investors. We need to create investor awareness and decrease the dependence on sentiment and increase the frequency of investment decisions based on fundamentals and numbers. So far, there has not been much headway in this direction. But, there is still hope, more than ever before.

Black Tuesday

This was definitely the blackest day in the history of the stock market with the index tumbling 171 points in one go. The market lost well over a billion rupees in capitalization in one day in what was a record fall in the index. This drop occurred at the same time that markets tumbled across the world and hence there was the feeling that perhaps this was also a reaction to the global crisis but while the fall in the region as well as in the Dow might have had something to do with this setback, there are many who believe that other reasons had a far larger impact on this slide.

It was on Monday that the world's markets started crashing and this continued till Tuesday, the day Karachi crashed. Brokers had different stories to tell and investors had their own versions. The most popular opinion among the brokers was that this was because the foreigner was now withdrawing his funds in order to cut losses suffered in Hong Kong and the rest of the region. But at the same time a lot of analysts said that the Pakistan market had very little to do with the turmoil. Their logic was that the extent of foreign funds in Pakistan was simply not enough to warrant such a reaction to the global crisis. It was believed that if any at all, it was just a sentimental and panic reaction to the regional crisis.

The tussle between the judiciary and the government is also believed to have been a major factor in the huge single day drop. Rumours were circulating that this could signal the end for the current government and this further aggravated the situation. It is not clear if any single one of these reasons could have caused such a reaction but it is obvious that things just came to a head and the market capitulated.