STOCK MARKET SCENARIO
THE KSE CREATING NEW RECORDS

All eyes are set at KSE-100 index crossing 5000 level

By SHABBIR H. KAZMI
Feb 02 - 15, 2004

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 market.

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.