Excessive selling by foreign fund managers mostly absorbed

May 07 - 13, 2001

Since January this year, economic fundamentals for Pakistan have improved a lot but large scale selling by foreign fund managers has kept the market range-bound. The situation can be described in two ways. Some say that it was an exhibition of strength of market and others believe that supply was more than the appetite of the market. However, unless fresh funds are diverted to equities market, the probability of sustained improvement in KSE-100 index may not be there.

The factors which should have built investors' confidence failed in triggering buying euphoria. These were the stand-by funding arrangement with the IMF and timely release of tranches, resolution of long outstanding dispute between WAPDA and HUBCO, large scale dividend payout by textile companies and bright prospects for Pakistan to enter into PRGF programme. However, the large scale depreciation of Pak rupee lured investors to divert their funds to money market for the purchase of dollars. While the Badla rates were still low, the large scale selling by foreign managers created surplus supply. PTCL share prices eroded considerably due to off-loading of investment by foreign managers. This was not unique for Pakistan, the same has been observed in other Asian markets. Bulk of the quantities were picked up by local investors instantly. However, these investors were not ready to take long positions and there was constant erosion in price.

During last couple of weeks while prices of some of the blue chips and volume leaders eroded, daily trading volume of some of the scrips increased considerably. To some extent this buying was based on expected results but largely on rumours. Analysts say that interest in Muslim Commercial Bank may be genuine but movement in Adamjee Insurance share price is not understandable. Similarly, the upward movement of prices of shares of Nishat Group's other companies, on the news that the Group had acquired a large stake in Adamjee Insurance is a unexplainable feature.

Therefore, these analysts tend to believe that it was an activity of market manipulators. The reason for this belief is that manipulators were able to move HUBCO share prices, in the past, and after the resolution of tariff issue, they are on a constant haunt for the scrips whose prices can be maneuvered rather conveniently. Karachi Stock Exchange and Securities and Exchange Commission of Pakistan (SECP) have taken various steps to check price manipulation by a few. However, unless brokers follow the code of conduct, real investors may not feel comfortable in investing in equities.

There is also a need to understand the reasons not allowing the investors to take long positions. The lack of interest in HUBCO was due to the lag in ratification of terms and condition stipulated in the agreement. However, the biggest uncertainty was about the possible dividend payout. Persistent erosion in PTCL prices was due to sale by fund managers who were off-loading their stake throughout Asia. This also creates apprehensions about privatization of telecom company which will also loose its monopoly status shortly. Investors are equally reluctant to take long positions in shares of fertilizer companies not because of any immediate threat affecting their profitability but due to extraordinary delay in announcing the policy.

The lack of interest in textile companies is for a number of reasons. Though, a large number of companies belonging to this sector have declared very high dividend for the year ending September 30, 2000, there is a strong apprehension that they may not be able to replicate due to higher raw cotton prices. On top of everything most of the textile companies have small capital base. Shares of good performing companies are mostly held by the sponsors or their associate companies.

Though, it has been stated by the economic managers repeatedly that some percentage of shares of selected companies would be sold through stock exchanges, the process is moving at snail's pace. People have hardly any interest in buying shares of nationalized commercial banks (NCBs). While efforts are being made to transfer non-performing loans to Corporate and Industrial Restructuring Corporation and clean up slate of NCBs, the process may take many months.

All eyes are on federal budget for the financial year 2001-2002. If the GoP decides to cut some duties and taxes, meeting revenue collection will become more difficult. Unless concerted efforts are made to broaden the tax base, increase collection of tax on agri income and restructure tax collecting regime the GoP will not be able to reduce budget deficit.