Updated Dec 28, 2002



AN ALL TIME HIGH!!!...ENTERING UNCHARTERED TERRITORY. Low interest rates in the economy, talk of decrease in NSS rates, foreign portfolio investment


and high levels of liquidity in the system resulted in the market breaching its previous all time high of 2661.34 points. Extremely high traded volumes also indicated the incredibly strong bull rally. The question that remains to be answered is that are we blowing a bubble that is likely to burst at any moment or is it the genuine investment force behind the rally. We say that both are true. While there is genuine investment in the market, some stocks are extremely over-valued. With the Index rising to these unprecedented levels so fast, we believe that volatility will be high. So our advice is to remain cautious, book profits and invest smart.


Liquidity is the key. There is so much liquidity in the system and with the investors having so few investment avenues available to them the equity market seems to be the only place to go. This liquidity driven rally has added over 5.40% during the last week with the KSE-100 Index rising from 2,525 points last week to close this week at 2,661.38 points, breaching the previous all time high of 2,661.34 points. The week commenced with some profit booking, however, the bull sentiment prevailed on the remaining three days of trading. Volatility was reflected by large differences in daily highs and lows. The stocks that were at the forefront this week were Hubco, Fauji Fertilizer and Engro, which increased by PkR5.90, PkR4.00 and PkR9.55 respectively.

Volumes remained high throughout the week with the average daily volume being 471mn shares as compared to 378mn during the previous week. Hubco led the active issues with total volume of the scrip amounting to 692mn shares followed by 464mn shares in PTCL.


We have no history for these levels. However, we believe that volatility is likely to remain high if the trading session on Friday is any indicator. Although the positive sentiment is likely to continue, we believe that cautiousness is the best strategy to adopt. We recommend booking profits at these levels and waiting for temporary lows to invest again. Play it safe.


Profit taking that had started on Friday, continued on Monday. Most of the stocks showed minor decreases especially PTCL and PSO, which declined by 70 paisa and PkR1.65 respectively. The market remained negative for most of the day, however last minute escalation in the price of Engro, which rose by PkR6.09, resulted in the Index reflecting a comparatively smaller decline of 16 points to close the day at 2,509 points. Volumes were low as against those during the previous trading day at 216mn shares, with Hubco and PTCL leading the list of most actives as usual.

Bullish sentiment was extremely strong on Tuesday and the Index rose by 42 points to close at 2,551 points. With the 2,600 levels in sight, the investors were optimistic about reaching the all time high of 2661 points. The bulls again came to the forefront, especially in key stocks like Hubco, the fertilizer stocks and PTCL. The second tier stocks also attracted a lot of attention and most stocks across the board reflected gains. The strong bull sentiment was also indicated by massive volumes with 420mn shares being traded.

After a day of rest on Wednesday, the KSE broke all kinds of records on Thursday, with the highest ever volume traded at 618mn shares, highest ever value of shares traded at PkR25.66bn and largest ever volume in any single stock-258mn shares traded in Hubco. Furthermore, the Index closed 86 points up at 2,637 points. Market sources implied that foreign investment, particularly in Hubco, was the major reason behind the bull fervor during the last two days. However, very low interest rates in the economy and high liquidity in the system were also cited as some of the main triggers.

The trading session of Friday was again very eventful with the market breaking its newly established records. The volume traded increased to 632mn shares and the value traded to PkR25.67bn. The Index also breached the previous all time high marginally by closing at 2,661.38 points. There was significant Khadim Ali Shah Bukhari & Co. Ltd. volatility with the day's low being 2621.80 points and the high being 2683 points.



We like SECP's initiative of campaigning for demutualization through creating awareness among the brokers via holding seminars. However, we are of the opinion that the broker community is unlikely to voluntarily adopt these changes and the regulator will eventually have to impose this structural change. If the broker community is too rigid on this issue, then as per one of the speaker, the SECP will have to come up with an alternate option, as the current state of the market is unable to cope with the changing demands of stock investing. On the other hand, if the brokers are willing to take this process on, we are of the opinion that some one should be there to "own" this program. We also tend to agree with the consensus opinion that there has to be a commercial viability in the process of the "independence" of the exchanges, whereas brokers would find some attraction in going towards demutualization. Being the most opportunist specie of mankind, brokers will have to come up with the commercial viability whereas they can always seek support from the regulator.


Undoubtedly, we are going through one of the best times in terms of "regulatory environments of the capital markets". The quantum of quality reforms that we have seen over the last three years is unmatchable to any previous era. We believe that this is primarily due to the "market orientation" of the regulatory environment with Shaukat Aziz & his team getting the best people of the trade to try and establish best practices in the industry through consultations and enforcements. Demutualization is also one such example where the regulator wants to convert the stock exchanges of the country to commercial organizations from their current status of guarantee limited companies. However, like every other reform, there are certain reservations among the brokers' community, as they think that the demutualisation exercise will throw them out of the market place that they have developed over the ages and they are in fact the owners of this market as well. On the other hand, the regulator seems to be of the opinion that demutualisation is a need of the hour and brokers will have to opt for this to survive in the trade. Tuesday's SECP seminar on demutualization is one such effort from the regulator to create awareness among the vested interest holders about the potential positive impacts of this liberalization of the exchanges.


The answer to "why demutualization" simply lies in the fact that this is the best route to improve the operating environments of the stock exchanges that have been riddled with the excessive dominance of the brokers. Though a significant improvement has been achieved through induction of private sector directors, the members still have a simple majority in the boards. To meet the challenges of more transparency in decision-making, higher level of investments in the infrastructure, more investor friendly environments and impartiality over everything, the bourses need to be converted into more market driven organizations i.e. commercial in their operations. The broker community is obviously opposing this move as it will eventually lead to an end to their dominance. We tend to agree with one of the speaker that stock exchanges will have to change themselves to cope with the changing demands of the investor community. Although The ideal route is demutualization, in case of serious opposition an alternative solution will have to be arrived at if the changing needs of the investors are to be fulfilled. In our opinion, there is no other option available better than demutualistaion. As far as the question regarding the imposition of the demutualisation by the regulator is concerned, though SECP is very much above board that it does not want to impose, we feel that an acceptance to this by one exchange would create pressure for the others and this will eventually lead to total enforcement. Reportedly, one of the exchange has already hinted towards taking this initiative on its own.


As a matter of fact, SECP needs an owner to this reform process. Being a regulator, it can always push a reform but someone needs to be there to support this exercise technically and financially. In our opinion the regulator can seek a significant role from Asian Development Bank for this exercise. Ideally, the second leg of capital market reform loan should have demutualization as one of the reforms. With its regional experience and the presence of "experienced professionals" , ADB can always come up with full

support to this program. In terms of financial support, a certain portion of the 2nd capital reform loan can also be used for the implementation of this reform.


We also tend to agree with one of the speaker who has raised the issue of commercial viability of this exercise. Surely, there are certain areas that need everyone's focus, as without having any material advantage, a community like brokers' would never be convinced to carry the process out. However, this aspect needs a thorough study where the exchanges have to identify the means to raise their revenues. We tend to oppose a straightway increase in the listing fee for every company as some of the smaller companies are unlikely to pay an annual fee like PkR1m. However, one should look for a listing fee as per either market capitalization basis or traded value basis. Similarly, the data service is one area that can be tapped for all the IT investing requirements. Anyway, the message over here is quite clear that there has to be a commercial viability in the process of the "independence" of the exchanges so that the brokers would find some attraction in going towards demutualization. Being the most opportunist specie of mankind, brokers will have to come up with the commercial viability while continuing to seek support from the regulator. The regulator would also have to come up with some attractions for the brokers to buy demutualization as a valuable reform.


The message, again, here is clear. Smaller investors will be the eventual winners in this exercise. Those who generally feel deprived with every market rally that these are the large brokers who are managing market prices as well as the market, owing to their total control over the exchange, would be comfortable as there will be a total independent management at the market place to look after their interests. Moreover, being commercial organizations these exchanges will also play an important role in the development of the capital markets along with the regulator. We foresee extremely positive impact for the stock market in the long run from this exercise.






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