The KSE-100 index gained 1,747 points during the
year 2004 to close at 6,218 level. By 4th March it gained more than
2,570 points, when the KSE index closed at 8,793 level. At this
juncture the market punters have two opposite opinions about the
future movement of the market. Some of them believe that the index may
cross the 10,000 level even before March end. Whereas, others say that
the long overdue correction is knocking at the door. But no one seems
to be ready to talk about the downturn.
Many analysts are of the view that during the last
20 months or so, the speculators have made so much money that no one
is scared of market dropping 1,000 points in quick succession. Even if
this happens, only a fraction of the money they have minted may be
lost. However, erosion of such a magnitude is very difficult due to
the circuit breaker mechanism being followed by the stock exchanges.
Interestingly, whenever there is a dip, investors are more than keen
to take new positions. Therefore, it is highly improbable that market
plunges by any substantial percentage in a single day.
It is also evident that now the transactions are
being made in millions of shares rather than in hundreds or thousands.
The market seems to be completely in the grip of large investors, who
are making a fortune and also assuming huge risk. They seems to be
following an old saying, 'higher the risk, higher the return'. With
each bet they hit a jackpot, gives them the courage to enhance their
stake in the next transaction. This tendency is pushing up the index
to new highs and there seems to be no end.
It is worth noting that the 'old lot', which has
been warning about the 'bubble' and not willing to take new position
once the index crossed 6,000 level has also joined the bandwagon. Now
they also seems to be following the slogan, 'make as much money as you
can'. No one seems to be afraid of down turn.
Any cynic may ask, are the stock exchanges managing
the risk prudently? Apparently, the stock exchanges are monitoring and
implementing the exposures and margins very stringently. Overflowing
liquidity enables the traders to deposit additional margins without
delay. And so far no one has failed in meeting the requirement.
However, it is also interesting to note that bulk of the daily trading
volume has remained confined to those scrips, which enjoy heavy
weightage in the KSE-100 index.
Some of the critics say that investors are not
making prudent decisions because at present prices buying seems
imprudent. The speculators say, "We don't buy on the basis of
dividend yield. We are looking at the potential trading gains only.
The difference in ready and future prices is very obvious. We don't
assume any risk by taking the delivery and selling in the future
market." The philosophy seems to be working efficiently when one
looks at the prices of ready and future market.
In the past it was often said that higher Badla
volume and Badla rates were a threat for the market. This philosophy
also seems to be wrong, or being ignored at least, for the time being.
The Badla volume is swelling with each passing day and rates are
hovering at the maximum. But neither the Badla providers nor the
investors feel any fear in enhancing the stake. If the traditional
Badla providers show even the slightest hesitation, the new breed is
always ready to finance the transaction of any size at the prevailing
rates. The number of equities eligible for COT is reducing but the
Badla volume is touching mind boggling levels.
A leading player said, "The critics must stop
talking about dooms day prophecy. This only discourages the small
investors to take new position. Panic selling by the weak holders
provides an opportunity to big and strong players to mint more money
and enhance their stakes." However, he also warned, "This is
not an appropriate time for the novice to enter the market. The train
is moving at a very fast speed and any one trying to embark can only
commit the suicide."
Some of the analysts are of the view that present
rally is driven by the foreign fund managers. They say, "The
share price of state-owned enterprises on the privatization list seems
to be going up because interested strategic investors are accumulating
the shares. These investors have a fairly good idea of the potential
'reference price', which is far higher than the presently quoted
prices. Therefore, they will continue to accumulate as many shares as
they can, till the quoted price gets closer to the reference price.
This will enable them to enhance their bid but lower the average cost.
They will also have the option to off-load the additional load at
attractive price and make substantial capital gains."
Historically, bulk of the daily trading volume at
the Karachi Stock Exchange has remained confined to less than two
dozen companies. At present bulk of the volume pertains to less than
half a dozen companies. Therefore, some of the analysts suggest that
now the stock exchanges should introduce two new indices, at least.
One index should comprise of five large companies, which also account
for the largest share in the average daily trading volume. The second
index should comprise of 25 volume leaders.
There is also a growing feeling that number of
listed companies at the Karachi Stock Exchange should be reduced to
one-third of the present number. All those companies having less than
Rs100 million paid-up capital should be delisted at the earliest. The
reason behind suggesting delisting of these companies are: 1) bulk of
the shares of these companies are held by the sponsors or the
associate companies, 2) there is hardly any trading in the shares of
these companies, 3) most of these companies are also on 'defaulters
counter' and 4) whether the quoted price is above par or below par it
is of hardly any consequence for the investors. Therefore, all such
companies should be asked to opt for voluntary delisting or stock
exchange should delist these by amending the listing regulations.
One must ask, what could be the impact if such a
large number of companies are delisted? According to various analysts
the listed capital may reduce by 5 percent. After the listing of large
cap companies, the listed capital is around Rs400 billion rupees. A
closer look shows that the listed capital of 117 spinning units is
around Rs11.5 billion, 19 textile weaving companies have a total
capital of around Rs2 billion and 13 companies belonging to paper
sector have a cumulative capital of Rs1.5 billion. Therefore,
delisting of some of these companies would not have any adverse impact
of the listed capital.
One of the objections could be, why should these
companies be delisted or asked to increase the paid-up capital if they
don't face any problem? In all prudence if the minimum paid-up
requirement for commercial banks, leasing and insurance companies is
being enhance to enable a more vital role, all other listed companies
should also be asked to meet a minimum paid-up capital requirement of
It is heartening to note that stock exchanges as
well as Securities and Exchange Commission of Pakistan are trying to
protect the interest of small/minority shareholders. However, the
presence of a large number of companies on the defaulters counter is a
scar on the face of stock exchanges. Names of some of the companies
are on the defaulters counters for years. There could be two possible
reasons: these companies are virtually dead entities but are kept
alive on books to claim certain benefits and 2) these exist only on
papers. Therefore, the stock exchanges and SECP should get of these.
It is strongly believed that the sponsors of these companies also have
interest in other businesses. Therefore, help of the central bank
should also be solicited to initiate winding up proceedings for these
There are some critics who still try to compares
today's equities market with that of nineties. They continue to say
that the present hype is creating the bubble, which has to burst one
day and the fallout would be worst than that of nineties. However, the
analysts and the market punters say, "There is a difference of
hundred eighty degrees between the present market and that of
nineties. Most of the large cap companies, also enjoying large free
float were not there at that time. Most of the scrips are still
trading at earnings multiples of around 10 as against an earning
multiple of above 20 at that time. Therefore, the prices have not
touched that alarming levels."
Some analysts say, "In nineties investors
picked up shares indiscriminately, without looking at the payout
history or earning potential. As against this today's investors are
picking up the shares having credible track record as well as earning
potential." To support their argument they refer to companies
like NBP, OGDC, PTCL and some of the cement scrips. Buying in these
shares is mostly due to earning potential. On top of this, corporate
earnings as well as good dividend payout keep investors' interest live
in these companies.
It is evident that despite increase in free float
of various listed companies supply of quality scrips has remained less
than the demand. One of the factors keeping supply less than the
demand is increase in number of mutual funds. The nineties rally was
mainly driven by foreign fund managers but present upbeat is due to
local retail as well as institutional investors. As such mutual funds
have emerged as the largest institutional investors. On top of this,
the growing interest of small investors in the equities is keeping the
The growing number of mutual funds and their good
payout has also attracted the attention of small investors. The total
size of mutual funds in Pakistan is less than 5 percent of bank
deposits. In many developed countries the size of mutual funds is
double or equal to the size of bank deposits. Even in the developing
countries the size of mutual funds is about half the size of bank
deposits. There is tremendous growth potential for mutual funds in the
country. Most of the small investors in Pakistan have already started
using mutual funds as vehicle to maximize their earnings from the
Commercial banks and insurance companies have also
emerged as big institutional investors. In the past these entities
used to invest heavily in the government securities as well as various
products offered under the National Savings Schemes. However,
imposition of restriction on investment in these instruments and
substantial cut in the rate of return has forced them to look for new
options. The investment in blue chips offers them regular dividend
income as well as opportunities to maximize capital gains. These
institutions, enjoying ample liquidity normally buy at dips and sell
when the time is ripe. This is evident from huge investment portfolios
maintained by these institutions. Their active participation has also
helped in containing the market volatility.
Two factors encouraging the small investors to
invest in the equities market are presence of the Central Depository
Company (CDC) and growing number of online trading facility.
Establishment of CDC has made instant transfer possible. Online
trading allows investors to make on the spot decision regarding buying
and selling, at his/her own convenience. The investor does not have to
call the broker to know the prevailing price and then wait for the
confirmation of trade. Availability of real time data allows the
investors to make on the spot decision and the automatic 'match making
system' confirms the trade in a few seconds.
The policy of offering shares of state-owned
enterprises to the general public has also helped in broadening the
small investors' base. Preference for small investors in public
offerings has increased the inflow of funds to the equities market.
One may say that most of the small investors sell their holding, which
is bought by large investors ultimately. However, it is also true that
handsome gains made also encourage them to keep on submitting
applications for the new offering and the funds remain in the equities
If the investors are bullish there should be no
room for those who are propagating doomsday prophecy. Keeping in view
the risk management system being followed by the stock exchanges, the
probability of market taking a nosedive seems highly unlikely. Looking
at daily high and low levels of the KSE-100 it is certain that
intra-day correction is common. The circuit breakers provide ample
breathing space and with every dip the index continues its upward
journey. News records are being created just to be broken in the
However, it is also necessary to keep in mind the
recovery plan, in case of a fall out. Analysts say, "We keep on
reminding the investors about the fall out to keep the factor bright.
Though, there may not be any massive correction in the near future,
but they must hedge the risk. It may be true that there are huge
trading gains but one should also keep in mind, the possible losses in
case the market goes through a massive correction."
Some of the analysts say, "We raise alarm for
the small investors, who are often carried away by the market
behavior. They usually suffer from herd mentality. They often enter
the market at a time, others are taking exit. That is the reason most
of them lose their money. No novice should try to enter the market at
Lately, the central bank asked the commercial banks
to comply with Prudential Regulations regarding their investment in
equities. At the same time the SBP also raised the minimum paid-up
capital requirement for the commercial banks. It is believed that the
central bank is also considering hiking the paid-up capital of
commercial banks to Rs6 billion. If this happens, even 20% of the
equity would be more than enough to double their stake in the
Capital market reforms and proactive approach of
regulators have improved the level of compliance to listing
regulations. Brokers' conduct is also being watched. But, there are
still some lapses. The first and the most disturbing factor is that
some of the entities offering online trading facility allow short
selling. As such short selling is a bad practice and once it is also
termed a violation, no one should be allowed to indulge in such
The other factor being that some of the brokers are
not asking the buyers to deposit margin, particularly for the future
trade. It is assumed that such trades would be settled without any
problem. It may be true that there has been no problem. It is only
because the share prices are moving up. However, not demanding margin
may lead to serious problems in case the prices go down substantially.
Though, the management of stock exchanges may not
be keen in reducing the number of listed companies, the SECP must
consider this seriously. If bulk of the daily trading is confined to
less than two dozen companies, why should the stock exchanges allowed
to carry the load of more than 650 companies? The reduction in number
of listed companies will allow the regulators to oversee the affairs
of remaining companies in a better manner.
It is also suggested that all the state-owned
companies should be listed at the stock exchanges and part of their
shares should be offered to general public. The recent public offering
has received tremendous response. It has helped the government in
divesting part of its investment in these entities at attractive price
and also expanding the shareholders' base. Government must also ensure
that recently privatized entities are also listed at the stock
exchanges and part of their shares should be offered to general