Excerpts from an exclusive interview with Arif Habib, Chairman, Karachi Stock Exchange

Nov 27 - Dec 03, 2000

Since January this year KSE-100 index has lost around 100 points. It is heartening to note while most of the stock exchanges in the region have registered over 15 per cent erosion in market capitalization during this period, Karachi Stock Exchange has not experienced the identical trend. Even after the May Crisis, though there has been reduction in trading volume, the erosion in prices is due to other factors, i.e. continuing IPPs dispute, inability of the GoP to conclude a long-term financing arrangement with the IMF and cost pushed inflation affecting profitability of listed companies.

Referring to the efforts made by the Karachi Stock Exchange (KSE) to minimize impact of May Crisis, Arif said, "It needs to be brought on record that the changes made in the Rules and Regulations regarding exposure limits of brokers were in the larger interest of the market participants and investors. The initiative taken by the KSE and its handling of the crisis must be appreciated. Had the timely changes were not implemented the magnitude of losses would have been much higher."

There has been constant erosion in market capitalization at KSE, Arif attributes this phenomena to a number of other factors besides May Crisis. He said, "Market players had expressed apprehensions when the market was around 2000 points in March/April. They expected a correction of 300 to 400 points. The speculative buying and price manipulation, by some Lahore based brokers/investors, changed the entire complexion of the market. Despite the efforts of LSE management to minimize the impact of inability of some of its members to honour timely and fullest settlement, the spill-over had a negative impact on KSE-100 index. The situation is expected to linger on for some time as the investors confidence in equities market has been shattered. However, I strongly suggest that retail investors should act more prudently than following herd-mentality. They should learn to differentiate between price manipulation and price change due to improvement in economic fundamentals for a company."

Arif has his reservations regarding the attitude of institutional investors in Pakistan. He said, "Contrary to the global practice of buying when prices are low, institutional investors in Pakistan accumulate when share prices are moving upwards. I believe that the role and attitude of institutional investors should not be that of an speculators aiming at making immediate capital gains."

The number of companies declaring dividend used to be relatively low in recent past. However, in last couple of years, not only the number of companies declaring dividend has increased, there has been improvement in payout also. However, the market is not fully responding. Arif attributes this to: depreciation of Pak rupee, higher interbank rates and delay in arriving at a long-term funding arrangement with the IMF by Pakistan.

While Pakistan is also going through the crisis faced by many other non-oil producing countries, the situation is more alarming due to widening balance of trade gap, cost pushed inflation and prospects for not being able to meet budget deficit target for longer term financing arrangement with the IMF. This would also affect the GoP's ability to reach a resolution with HUBCO a factor which has been responsible for lower influx of foreign direct investment and portfolio fund into Pakistan.

To conclude Arif said, "The improved market efficiency and transparency depicts greater confidence of retail investors in Pakistan's equities market. Out of the three recent public flotations two were fully subscribed/over subscribed. I would also say that involvement of large scale retail investors has compensated, to a large extent, for the lack of interest of foreign portfolio funds. However, Pakistan's equities market look attractive at current prices. A higher dividend payout for the year ending June 30, 2000 is expected to once again attract the attention of market participants. There is a forecast that Pakistan would be able to conclude a long-term funding agreement with the IMF, on better terms and conditions, and resolve IPPs crisis."