EVENTS AND ITS EFFECT ON BOURSE...

MARIAM NASIR
Manager Research
Sep 03 - 09, 2007

Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months has set off mass liquidation of housing loans packaged as securities. This crisis also eroded healthy amount of capitalization from the bourses of the countries and shed the index drastically in the range of 10-25%. However as of now the international market have recovered and are currently down in the range of 4%-13%. The highest decliner being the local bourse KSE-100. Earlier, KSE-100 touched its all time high on July 13, 2007 at 14202.23, whereas markets of other countries BSE (India), Jakarta Composite (Indonesia), KLSE Malaysia), Strait Times (Singapore), Nikkei (Japan) and the Seoul Composite (South Korea) made their all time highs after a couple of days.

Earlier during last fiscal year KSE-100 Index registered an outstanding growth of 31% on a year on year basis marking growth in sixth consecutive year. However the performance of the stock market was not as good when compared with other Asian Emerging Markets. KSE, in FY07 was below than the major Asian Emerging Markets. In FY07, Pakistan market underperformed both MSCI EM (43% return) and MSCI EM Asia (41%). Shanghai Composite of China rose by 129% followed by Indonesia's Jakarta Composite with a growth of 63%. KLSE Composite of Malaysia rose by 48% to close at 1354. Whereas Strait Times of Singapore and BSE-30 rose by 46% and 38% respectively. Nikkei was the worst performer amongst the market as it rose by mere 17%.

AMERICA'S SUBPRIME MORTGAGE WOES AND ITS IMPACT

America's subprime mortgage woes have such a big impact on world financial markets because these mortgages were lumped together in packages and sold as asset-backed securities all over the world, particularly in Europe. Often the initial securities were themselves put into new packages, leveraged up and resold as so-called collateralized debt obligations. They are a sort of derivative play on the underlying mortgages, just as futures and options are a play on stocks and commodities. Big banks have whole securitization departments who create these instruments. They do so to profit from the difference between the long-term returns these investment vehicles produce and their more plain vanilla short-term borrowing, and to earn fees.

EMERGENCY AND STOCK MARKET BEHAVIOR

In Pakistan, there have already been five instances of declaration of emergency. In October 1954, November 1970, August 1990, May 1998 and October 1999. In May 1998 KSE-100 went down by 12.4% whereas in October 1999 it went down by 7.4%. Similar behavior was expected this time but ultimately this untoward situation never occurred and rumor subsided.

DFM, KARACHI BOURSE PLAN CROSS LISTING TO TAP LIQUIDITY

Pakistan's Karachi Stock Exchange may sign an agreement with the Dubai Financial Market in October to cross list companies and soak up liquidity in the second-largest Arab economy. The Pakistan Business Council, which is playing matchmaker between UAE and Pakistani markets, plans the first Dubai listing of Pakistani firms in which UAE investors have major stakes. Pakistan Telecommunication Co Limited (PTCL), which is 26% owned by UAE Emirates Telecommunications Corp (Etisalat), is a priority listing in the UAE. United Bank Limited, Bank Al Falah and Oil & Gas Development Corp are also being considered. The listings could take place by the end of the year, or by the first quarter of 2008.

KSE 100 INDEX AND THE MONTH OF RAMADAN

The holy month of Ramadan is expected to commence. There exists a positive co-relationship between the holy month of Ramadan and the market movement. If we take into account market movement exactly a month before Ramadan to 1st Ramadan, we see that in the past seven years except for 2003, market has always witnessed a positive trend and offer healthy returns to investors. The average five years and seven returns for the period under review is 7.42% and 5.66% respectively. However, if we take into account market movement between 1st Ramadan and last trading session in Ramadan or first trading session after Ramadan, we can clearly see that in the past seven years except for 2001, market has always witnessed a positive trend and offer robust returns to investors during this period. The average five years and seven years return for the period under review is 2.08% and 5.26% respectively.

UPCOMING POLITICAL SITUATION AND ITS IMPACT

Pakistan is in the midst of another political crisis. The next few weeks are very crucial and would set the stage for some major changes in the post election political set up in the country. Economic benefits of several years of structural reforms and successful privatization program are not likely to fade away in the face of this crisis. In fact, the features of economic policies under Musharraf rule more or less mirror the broad economic objectives of previous governments led by Benazir Bhutto and Nawaz Sharif. The most likely future scenario is the agreement of Musharraf with Bhutto, leading to re-elect Musharraf as civilian President. In the most likely scenario where an agreement is struck between Musharraf and Bhutto, investors would be very excited, leading to higher investment in the country.