For some time the KSE-100 index has been hovering
around 4,700 level and the market is anxiously waiting the time it
crosses 5000 level. A number of factors, which were the reasons for
uncertainty for quite some time, no longer exists. With the expectation
that the GDP growth may exceed 6% and exports crossing US$ 12 billion
target, it is more or less evident that the country's economy has
entered the expansion phase. This perception is also supported by credit
offtake by the private sector.
Privatization policy of the GoP is also providing new
impetus. The sale of shares of National Bank of Pakistan (NBP) and Oil
and Gas Development Company (OGDC) through stock exchanges has increased
the market float as well as expanded shareholders' base. The ground is
already ready for sale of further shares of Sui Southern Gas Company (SSGC),
scheduled immediately after Eid holidays. The latest public offer of
Pakistan Capital Market Fund has been over subscribed. All these issues
will raise the listed capital as well as market capitalization to new
high. The index would have gained substantially had the OGDC was part of
the KSE-100 index.
According to some analysts, the daily trading volume
is clearly dividend into two segments, one pertaining to day traders and
the other pertaining to investors. However, it is worth mentioning that
quantum of day trades has increased substantially. The analysts say that
picks of both the groups are different. Investors still prefer to
accumulate scrips offering good dividend yield. Whereas the day traders
are eyeing second and third tier scrips. Prices of second and third tier
scrips have gone up substantially lately.
According to Arif Habib, Chairman, Karachi Stock
Exchange, the growing interest in second and third tier scrips is mainly
due to their earning potential. These scrips mostly belong to cement,
fertilizer, automobile and commercial bank sectors. The investors
interest is mainly due to expected higher profit of these companies.
These scrips were grossly ignored in the past because most of the blue
chip scrips were still selling at a discount to their fair value.
However, once the quoted prices attained current level, investors as
well as day traders started looking at second and third tier scrips.
It is heartening to note that the index has been
registering persistent gains. However, some analysts are a little
concerned about intra day movement of the index. They say that the wild
movement of index on a day is due to grossly large percentage of day
traders. The day traders are following the rule of thumb, 'buy on
weakness and sell at strength'. According to Arif Habib the wild
movement of index is an outcome of T+3 system being followed by the
stock exchanges and should not be a cause of concern.
Looking at the market appetite it may be right to say
that there is still acute dearth of quality scrips. Lately some mutual
funds were floated and invested bulk of the proceed in equities market.
Similarly, commercial banks have been diverting a large part of their
surplus liquidity to equities market. With the imposition of a cap on
investment of commercial banks in equities and requirement to bring the
investment within the limit stipulated in Prudential Regulations, some
banks are forced to make adjustment in their portfolio. Though, they
still have ample time to bring their investment within stipulated limit,
they often have no option but to get rid of low yielding investment.
The traditional Badla system has been playing a vital
role in keeping equities market vibrant. However, the plan to gradually
replace the prevailing system with margin financing also posses
transitory problems. It may be worth mentioning that some of the Badla
providers are also the largest borrowers from the banking system. If the
prevailing system has to be changed, the banks will assume the role of
Badla providers, which is not being liked by some.
It may not be out of context to reiterate the need
for reducing the number of listed companies. According to some analysts,
the stock exchanges can conveniently reduced the number to at least half
by fixing the minimum paid-up capital requirement at Rs 100 million.
However, the objective can only be achieved if the stock exchanges
ensure buyback of shares by the sponsors at a decent price. A large
amount of investors is stuck in 'dead' companies. If such investors get
their original investment back it will again come back to the equities
Last but not the least the GoP must enlist all the
state owned enterprises at the local stock exchanges without further
delay and offer at least 10% of their shares to general public. Unless
the market float increases, the prices of quality scrips will continue
to hover at higher level, which affects dividend yield negatively.