The prevailing negative sentiments can further erode the index until the resolution of the settlement issue

Mar 28 - Apr 03, 2005



Till recently, the Pakistan was termed the best performing market in the region. Despite the recent unceremonious fall, it still remains the best performing market. However, one has all the reasons to raise the finger at the regulators for the recent debacle. They did not take the notice when the bubble was developing but their belated measures pricked it. Then were the fire-fighting measures, which added to the confusion only.

A closer look at the KSE-100 index reveals that there was a gain of 4,086 points from the beginning of the year till March 15th and then came an erosion of 2,338 points in seven sessions. The bull-run was led by index heavyweights particularly OGDC and PTCL but the decline in the index has been far more broad-based.

According to InvestCap report, "On an intraday basis, the KSE-100 index has been one of the most volatile indices in the world since the start of 2005".

The prevailing scenario is best described by Ali Alvi of AKD Research, "The stock market is a study in human psychology as it is human emotion that drives all market actions. A healthy human mindset is cautious and skeptical, but also realistically optimistic. Throughout the early stages of a bull market, investors tend to be cautious and skeptical, as well. Nearing the end of a bull market, the market psychology becomes manic or excessively euphoric. The bottom of a bull market starts when stock market is weak and the general population is pessimistic. Most investors sell after having endured a torturous bear market. Extreme pessimism found at the bottom is always irrational and undeserved. At this stage, savvy investors start accumulating bargain stocks. Money comes from specialists, market makers, hedge fund traders and corporate insiders."



There may be light at the end of the tunnel but one must also try to find out the reasons for the recent debacle. While the small investors may have lost their life savings, the real threat was from six to twelve brokerage houses facing settlement crisis. A violent demonstration at the Karachi Stock Exchange was attributed to small investors. The efforts to defer March Future Contracts squaring and settlement was also said to be aimed at saving the small investors. According to an analyst, "All the efforts were aimed at saving the brokers rather than the small investors. For a very long time the real investors were sitting on the sidelines and watching the drama staged by the gamblers. Shares were not being bought on the basis of dividend yield or earning potential. The only driving force was trading gains. Therefore, if there were no real investors, why there is a talk about saving them from the losses."

According to an investor, "I don't have any sympathy for the gamblers or the brokerage houses but the fact is that their acts have caused substantial losses to real investors. Across the board fall in equities has also brought down the prices of quality scrips enjoying strong economic fundamentals. Therefore, in all fairness, the gamblers and reckless brokerage houses must bear the brunt. The SECP must take exemplary steps against those, who are proved guilty. It is not the question of losses to investors but the well being of the market. No one should be allowed to cause a dent to the investors in general and Pakistan in particular."

Another analyst says, "If one looks at the daily trading volume it is evident that bulk of the volume was due to those who were looking for trading gains. A default like situation has arisen only because most of the day traders never thought about the possible fallout. No one was ready to hear that the market could go down. Even some of the brokerage houses became a little careless in demanding margins. The fall of the market started soon after the Securities and Exchange Commission of Pakistan (SECP) introduced risk management measures and then all the flood gates were opened."

Assuming, hypothetically, that some brokers are facing a default like situation, what should be the strategy and mechanism? First of all it is required that the SECP should probe and find out the reasons, which led to the crisis. It is heartening to note that the regulators have expressed their firm view to undertake thorough probe. However, the need of the time is that all those who have been working in the gray area must be exposed and dealt without any discrimination. It is sad to note whenever the investors enter the equities market, the ruthless elements not only deprive them of their life savings but also raise questions about the transparency and efficiency of the market.

The investors should not be distracted by the present situation. After the recent fall in the prices of quality scrips, the values have become attractive once again. Investors should try to accumulate in a staggered manner. Timely decisions are crucial because they may miss a good opportunity like those who were not wise enough to sell when the prices were touching the peak levels.