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.
MARKET THIS WEEK
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.
OUTLOOK FOR THE FOLLOWING WEEK
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.
DAILY DRAMA
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.
SPECIAL FOCUS: DEMUTUALIZATION
ROAD TO
DEMUTUALIZATION...
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.
SECP'S SEMINAR ON DEMUTUALIZATION
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.
CHANGING REQUIREMENTS 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.
WE NEED AN OWNER OF THIS EXERCISE!
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.
COMMERCIAL VIABILITY OF THIS EXERCISE
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.
MESSAGE FOR INVESTOR
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.
MARKET ROUNDUP |
| .. |
LAST WEEK |
THIS WEEK |
% CHANGE |
|
Mkt. Cap (US $ bn) |
9.58 |
10.08 |
5.22 |
|
Total Turnover (mn
shares) |
1891.00 |
1884.70 |
-0.33 |
|
Value Traded (US$ mn.) |
1366.00 |
1314.23 |
-3.79 |
|
No. of Trading
Sessions |
5 |
4 |
|
|
Avg. Dly T/O (mn.
Shares) |
378.20 |
471.18 |
24.58 |
|
Avg. Dly T/O (US$ mn) |
273.20 |
328.56 |
20.26 |
|
KSE 100 Index |
2525.00 |
2661.38 |
5.40 |
|
KSE All Shares Index |
1571.16 |
1649.35 |
4.96 |
