The market has to break out from this dull phase and the likely downside is inevitable


Sep 06 - 12, 2004












Ever since the capital value tax (CVT) has been imposed, average daily trading volume has remained very low. Even, better than expected financial results by some of the volume leaders failed in triggering buying spells. In a nutshell, the market has remained rang-bond and there seems to be no hope of improvement in daily trading volume in the short run.

According to an AKD report, "The market has been indifferent to the events in the last few weeks and the trend is unlikely to be broken in the coming week as well. In fact next week will not see any major result announcement for the market, thus nothing in the pipeline to make an impact. Similarly, daily trading volume has also shrunk considerably, reducing the speculative angle and volatility in stock prices. However, the market has to break out from this dull phase and we maintain our view that the likely downside breakout is inevitable.

Potential triggers failed to make their impact. During the week some major events materialized. ICI Pakistan sold its 25% stake in PPTA, realizing a one-time cash flow of Rs 3.974 billon, which will be used to pay off its debt, undertake capital expenditure as well as increase the dividend payout. However, the stock price remained relatively stable and the overall market was unfazed. The second major event was the announcement of financial results by HUBCO for the year ended June 30, 2004. The results were slightly higher than market expectations. However, the stock price remained stagnant and so did the overall market.

Previously, the low average trading volume was attributed to dearth of quality scrips and inadequate free float. Listing of large cap companies like National Bank and OGDC and offer of additional shares of National Bank, SSGC and PIA should have resolved the issue. According to some analysts neither the supply of quality scrips nor the economic fundamentals are the issues. Imposition of CVT has been keeping the investors away from the market. It has been asked repeatedly that the government should withdraw the CVT. The demand has become more vocal after the Indian government withdrew the CVT.

According to an analyst, "The big brokers in Pakistan are also the big investors as well as Badla providers. Lately, it has been observed that some of the big brokers have also become the promoters of mega housing projects, either directly or indirectly. Therefore, the focus of their attention has shifted away from equities market to real estate business. This movement/migration of funds continues to keep the daily trading volume low. It will not be wrong to say unless the focus shifts back to equities market one should not expect any increase in trading volume."



According to another analyst, "It is often being said that institutional investors are not participating actively in the market. Very few people try to understand the reasons for their staying away from the market. One must remember that the key institutional investors in Pakistan are the commercial banks. Since State Bank of Pakistan has fixed the maximum exposure limit in equities market for the banks and also monitoring it closely, most of them (banks) are in the process of offloading their holdings. They cannot afford to accumulate more even if the prices and/or dividend yields are attractive. Therefore, they have no option but to stay away from the market and continue offloading the excessive load, depending on the market appetite."

According to an investor, "Whatever trading volume one sees is not the true reflection of market activity. Bulk of the volume pertains to day traders. The volume pertaining to real investors is too small. One sees a emerging of a dangerous trend, whereby trading volume will only be confined to day traders. Most of the investors, particularly the new entrants have been the victim of this contentious disease."

He also added, "The blame for encouraging people to indulge in day trading goes to the government. The real investors have to pay all types of taxes. As against this day traders make a lot of money, which is tax free also. On top of this people making capital gains are not willing to pay any tax. The most glaring example is the resistance against CVT. Effectively; the government has bowed down before the pressure by bringing down the CVT rate. If the government is serious in expanding investors' base in the country it should bring down corporate tax rate, exempt dividend income from tax and above all enhance the tax rate on capital gains."

The events having the potential to change the market complexion are the upcoming result announcements of index heavyweights like OGDC, PTCL and Pakistan Oilfield. However, most of the expectations are priced in and the market is unlikely to react in any significant manner. Therefore, with all positive news priced in and Badla investment close to its peak, weak holders will see no value in holding on to stocks. The supply is likely to increase in the coming weeks, particularly due to transfer of PPL shares to applicant accounts, and trigger the downside.