STOCK MARKET RECENT FALL
Economic fundamentals are still strong
By SHABBIR H. KAZMI
Mar 20 - 26, 2006
During last couple of weeks the KSE-100 index has exhibited highly erratic movement and also registered substantially formidable fall during certain trading sessions. Not only that intra day surges were intense but the index recorded two historic falls, first of lesser magnitude (467 points) but the latest virtually at the maximum possible limit, to be precise 487 points. The fall may have been sharper had the existing 'lower lock' system was not in place. The index eroded by 941 point during last week alone and 1500 points in two weeks altogether. One fails to find a plausible rationalization for the erratic movement of the index because most of the factors being said to be responsible for the fall are too week to accept.
A number of questions are being raised about this sharp decline which includes:
1) Is this the mirror image of last year's equities market crisis?
2) Are there some inherent weakness in the regulatory and monitoring systems?
3) Is the market at the mercy of 'big' players?
4) Is the market so fragile that it can fall on the wildest rumour?
5) Does the number of small investors have any significance in the country?
6) Are there some elements, which deliberately spread rumours to create crisis like situation?
1) IS THIS THE MIRROR IMAGE OF LAST YEAR'S EQUITIES MARKET CRISIS?
Though, many Pakistanis have short memory and often forget the worst crisis, be it fall of East Pakistan or blowing up of President, General Zia-ul-Haq's aircraft. It also seems that capital market players had also forgotten March 2005 crisis. As the market was making upward strides some of the analysts hinted towards over-heated market. However, speculators kept on pushing the prices to unrealistic levels. It was also said that in the absence of fresh good news, the market might not sustain its upward move. Though, most of them were sure of the ultimate and substantial correction some of the players (precisely gamblers) kept on testing the limit. Now it is once gain being said that investors have lost billions of rupees. One should not have any sympathy with the gamblers because they entered to killed but were killed.
Most of the reasons being quoted by the members and the analysts for the fall of market are beyond comprehension. These include: 1) eventless visit of US President George Bush, 2) political uncertainty due to repeated strike call, 3) potential conflict emerging in the region due to Iranian stance regarding uranium enrichment, 4) selling by the foreign fund managers, 5) institutions indulging in profit taking and 6) an error in KSE system. However, if one examines the situation, none of the factors or all the factors may be held responsible for the situation. According to some analysts the market did not plunge on the day of bomb blast in Karachi but took a nosedive after publication of a news item in a local daily. This clearly shows that punters and speculators were looking for an escape goat and the news item proved to be the best.
2) ARE THERE SOME INHERENT WEAKNESS IN THE REGULATORY AND MONITORING SYSTEMS?
It is often said that most of the equities market crises are broker-led and the history also substantiate this belief. It has been often highlighted that crisis like situation arises because brokers wear many caps. These include 1) broker, 2) market maker, 3) investor, 4) asset manager, 5) financier, 6) directors of listed companies and 7) regulators. This often leads to conflict of interest. It was believed that with the nomination of non-member directors by the Securities and Exchange Commission of Pakistan (SECP) the situation would improve. However, the common perception is that non-members directors have not been able to play their due role, either they are too busy with their own chores or they lack expertise to understand the conduct of brokers. By the time they are able to understand the emerging crisis and take corrective steps, it is too late to mend.
3) IS THE MARKET AT THE MERCY OF 'BIG' PLAYERS?
Having said that brokers conduct leads to crisis it is also important to discus the role of institutional investors. The existing rules demands clear classification of securities held by institutional investors, including the mutual funds. However, the overwhelming perception is that institutional investors as well as mutual funds have become 'day traders'. A member had recently termed them 'hourly traders' as they actively participate in the intra-day trading. Though, it is yet to be proved that they indulge in such activities, one tends to accept attribution to the members.
There is an old saying, 'wherever is smoke there is a fire'. One tends to accept the statement on face value. It is being said that sponsors, institutional investors and mutual funds hold bulk of the listed capital. The average size of free float ranges from less than five to ten percent depending on the sector and the company. Last year's crisis was termed 'settlement crisis' and the time proved it. As the KSE management and the SECP have been trying hard to strengthen the risk management system, some of the players do succeed in driving benefit from the loopholes.
4) IS THE MARKET SO FRAGILE THAT IT CAN FALL ON THE WILDEST RUMOUR?
The latest fall was said to be the result of a news item published in a local daily. One fails to understand that such a news item has the strength to trigger massive selling. Any one trying to link the selling with this news is either trying to mislead the others or a complete novice. The subsequent denial of the news could only be called a cover up. This rationalization may seem far from reality but many analysts are of the view that some of the 'trend setters' had planted this story to create a justification for selling. However, this selling could not be termed 'distressed' selling. It was a calculated move. It was another thing, that some of the 'small investors' were killed due to this.
5) DOES THE NUMBER OF SMALL INVESTORS HAVE ANY SIGNIFICANCE IN THE COUNTRY?
The recent hue and cry about the market will also be loaded with cliché thousands of small investors have lost billion of rupees. One really wonders about the number of small investors. It is sufficient to say that the number of real investors is too small in Pakistan, even less than 25,000. Others indulging in daily trade are 'day traders' or speculators. According to a critics 'a day trader is a person who buys and sells equities daily but hardly develop any portfolio. His/her sole purpose is to preferably square his position at the end of the day or within T+3 period. Such persons operate with small 'seed money' and in case of unexpected price movement take advantage of 'Badla'.
If one can recall even last year crisis was due to settlement issues. This statement is substantiated by the formation of a consortium, which bought OGDC shares at an announced price to facilitate settlement. The consortium bought up to 100,000 shares per individual. At that time it was also said that the arrangement was aimed at saving the small investors. However, one wonders that any one holding even 1,000 shares could be termed 'small investors'. The point to remember is that consortium bout OGDC shares at a price of Rest 117 per share, the cost one thousand shares translated to one hundred and seventeen thousands. Therefore, it is difficult to decide whether the arrangement was made to save the small investors or the brokers who were facing potential default.
6) ARE THERE SOME ELEMENTS, WHICH DELIBERATELY SPREAD RUMOURS TO CREATE CRISIS LIKE SITUATION?
After March 2005 crisis, it was said that there are certain groups, which have vested interest. They are often termed 'market manipulators'. It may be difficult to prove that there are some people, who have the power to set the direction of the market but it is also a fact that such manipulators either spread rumours directly or facilitate printing of 'planted stories'. One need not doubt the integrity of newspaper publishers but at times the monitoring and surveillance may be a little weaker which leads to oversights. It is also believed that at time price sensitive information is published without verification or confirmation. Publication of such news items/stories often cause erosion of market capitalization and embarrassment for the regulators as well as the management of listed companies.
One such example was publication of a news items in a daily, quoting Central Board of Revenue (CBR) sources that it was considering imposing some additional taxes on buying/selling of shares by the investors. The KSE-100 index registered significant decline on the day of publication of the story. However, the very next day a contradiction was issued by the CBR but the damage was already caused. Most of the analysts are of the view that the news item was not worth publishing and the prominence it got. Having said this it is also important to highlight that investors should have not responded to such a news item in this manner. Before offloading their holdings they should have confirmed the news from the KSE and/or the brokers.
It may be very easy to shift the blame from one person to another or from one institution to another. However, all the stakeholders have to realize their responsibilities and also try to discharge them. Be it the SECP, the KSE, mutual funds and institutional and retail investors their buy/sell decisions should not be influenced by the herd mentality. It may be very easy to attribute any reason responsible for the fall but for how long the market will continue to offer such rationalizations.
As regards the recent fall it is necessary to say that March 2005 crisis was a 'settlement' crisis and the latest one is nothing but a correction, which was over due. The index just cannot keep on posting new record highs, it also has to under go correction. A decline of couple of hundreds of point on a particular day should not be a cause of grave concern. Couple of hundred points fall at the time the index was hovering around 1,200 points was significant but seems 'not a serious concern' when the index is hovering above 10,000 points.
It is also necessary to reiterate the point that a lot is being said and done in the name of small investors. However, the people pleading the case of small investors are the 'giants'. They indulge in highly risky speculative trading. They make millions of rupees but never talk. However, as soon as they start losing money they use 'small investors' card. After last year crisis a lot of hue and cry was made in the name of small investors and almost the same is being pitched now.
It is often being said that institutions indulge in day trading. Since they have substantial holding capacity even an indication that they are selling/buying often changes mood of market. It is also alleged that they indulge in buying and selling simultaneously. It is one of the reasons that now bulk transaction even do appear. The reason for incorporating this system was that in the past such transactions were having adverse impact on the market, at times.
The small investors should abstain from investing directly into the equities market. The best option for them is to invest is mutual funds having credible dividend payout record. The regulators should also examine the mutual funds microscopically to avoid any mishap, affecting investment and/or return on the investment.
Last but not the least investors should also invest on the basis of economic fundamentals rather than rumours or the word of mouth. Some of the brokerage houses produce excellent research reports, which must also be read before making any decision. An informed decision is certainly more prudent than playing blind.