Feb 03 - 09, 2003



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 markets.

PAGE: How 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 KSE.

PAGE: How can this be prevented in the future?

AQIB: 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.



PAGE: What should small investors do?

AQIB: 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 cause!

PAGE: Where should the SECP's and government's emphasis lie with regard to strengthening the equity markets?

AQIB: 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 companies.

PAGE: What about analysts who fuel over-exuberance in the market?

AQIB: 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?

AQIB: 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 Fertilizers.