AQIB ELAHI MEHBOOB is the Head
of Research at AKD Securities — the KSE's biggest broker in terms of
volume. He started his career back in 1999 at Khadim Ali Shah Bukhari
& Company (KASB) where his responsibilities included the Pakistani
economy and commercial banks, and went on to head the research
department there. He has been a frequent columnist for PAGE where he has
written about issues facing the Pakistani economy and the capital
do you view the recent crisis in the equity markets?
AQIB ELAHI MEHBOOB:
Well, first and foremost, I don't view it as a crisis. A crisis would
imply that it was something that was unforeseen, which was not the case.
Our house, and a couple of others, had been pointing out from 2800
levels that the market was in need of a correction due to unsustainable
'badla' or Carry Over Trade (COT) rates. If one were to apportion the
blame, then the majority of the blame must lie with the smaller
investors and brokers who had leveraged their positions at unsustainable
levels, and particularly with those brokers who had stretched their
capital adequacy levels knowing well that this would invite action from
the SECP. Though, I do tend to agree with PAGE to the extent that the
KSE and SECP must be more proactive in curbing the over-exuberance,
though the major onus has to be on the brokers self-regulating and the
PAGE: How can
this be prevented in the future?
As I have noted the onus is on the brokers themselves and the KSE
management. Perhaps it emphasizes the importance of demutualizing the
exchanges. I also believe that the government should look at removing
the tax on dividends (to the extent of making it tax deductible for
listed companies), while imposing a tax on capital gains. The removal of
dividend tax on a tax deductible basis will not only raise dividend
yields but also encourage companies to pay dividends and also encourage
the listing of new companies.
should small investors do?
I think the losses highlight what I have written over the past year. I
believe that small investors should not invest in the market directly
because very few of them have the required expertise to manage the risk
involved in equity investments. They should take equity market exposure
though mutual funds, which have experienced and professional fund
managers. Furthermore, I would like to stress again that the equity
market is not a source of livelihood for anyone except the brokers, who
earn their keep through broking income. Investors who make equity market
investing into their livelihoods are prone to over-leverage and trade on
sentiment — the two recipes for disaster. Quite frankly, I have no
sympathy for investors who leverage their investments or act without
proper fundamental analysis, though the press seems to champion their
should the SECP's and government's emphasis lie with regard to
strengthening the equity markets?
In short, the government needs to consider increasing the float of
public sector companies like PTCL, PSO and NBP in the market. This has
been successfully done in the case of NBP. Furthermore, it should
consider listing other entities such as Habib Bank, OGDC, PPL and even
PTV! This would not only increase the scope of equity investment and
enhance market capitalization, but also aid the government in price
discovery for the privatization of some of these entities. The SECP must
really push forward with the demutualization of the exchanges, and also
look at ways to reduce sponsor (indirect ones too) holdings in listed
about analysts who fuel over-exuberance in the market?
You would be surprised how objective and cautious analysts in Pakistan
are versus their counterparts in OECD countries. Furthermore, its
important to understand that analysts in Pakistan are quite
inexperienced because the best and more experienced analysts, like
Nadeem Naqvi, Ibrahim Masud or Salman Ali, opted to leave the country or
change professions during the bear market between 1995-2001. And that
this not to mention the obvious disadvantages these analysts have in
terms of information availability. In those circumstances, I believe
that the top 3 or four houses in terms of research do a very good job.
PAGE: Where do
you think the market is headed?
Almost all the indications are positive. In fact, as a result of the
recent decision of the SBP to target a higher M2 growth level for FY03,
we have revised our KSE-100 index target upwards by 120 points to 2720.
But in the short term, I believe that the index needs to consolidate
between the 2500-2661 level, before the faster monetary growth kicks in
to push the index higher. Longer term investors should target stocks
offering both growth and dividends i.e. Lever Brothers and Fauji