July 14 - 20, 2008

Last month, Pakistan stock markets witnessed an unprecedented gain and recovered 1,290 points or 11.5 per cent but its record performance proved a balloon inflated by the temporary market stabilization measures taken by the regulators that ultimately burst on the last trading day of the last week of June. The benchmark Karachi Stock Exchange (KSE) 100-share index on 27 June declined by 99 points or 0.79 per cent and closed at 12,353 points eroding Rs26 billion from market capital to Rs3.795 trillion. It hit the six-year low turnover at 29.7 million shares with 13 dozen stocks hitting lower circuit breaker of one per cent. Similarly, the KSE 30-Index shed 134 points or 0.92 per cent and closed at 14,459 points. By 26 June, the KSE 100 share index had recovered 1,290 points or 11.5 per cent to 12,452 points from 15 months low of 11,162 points closing of June 23. By June 23, the market had witnessed a drastic fall of more than 4,500 points or 29 per cent from 15,676 points all time high of April 18, 2008.

On June 24, the KSE 100-share index had gained 960.50 points or 8.60 per cent at 12,122.67 and recovered Rs285 billion in the market capital at Rs3,731 billion. The market had broken all its previous records of single day gain on Tuesday. The KSE 30-share index had also gained 1,219.28 points or 9.56 per cent at 13,969.56 registering a new all-time high record. Apparently, the index had bounced back on the back of the market stabilization measures announced by the Securities and Exchange Commission of Pakistan (SECP) last Monday. The important question that however kept on boggling the minds of foreign investors and market analysts has been "Will the market be able to sustain this bullish trend in the present scenario of perpetual political instability and the country's negative economic outlook?

The highest single day gain on June 24 had come as a positive development about the market, which has so far been with strong negative sentiment during the last two months.

Previously, the KSE 100 index had witnessed the single day gain of 643 points this year on January 3 following crash of the market in the aftermath of assassination of former Prime Minister Benazir Bhutto on December 27 last year. The KSE-100 index witnessed a steep decline of 28 per cent or 4,500 points in last two-month period. That is why, the officials of SECP, the chief regulator and Board of Karachi Stock Exchange held a meeting on June 24 and announced at least four market stabilization measures. The measures restricted the lower circuit from 5 to 1 per cent and raised the upper circuit from 5 to 10 per cent. It means that the price of equity could gain maximum to 10 percent and decline minimum to 1 per cent in a trading day. Short Selling has also been completely prohibited in Deliverable Future Contract Market. It was also announced that Rs30 billion market stabilization fund would also be launched that would be utilized in case volatile circumstances are witnessed in the market.

The sudden changes in the limits placed on high or low price of scrip in a single trading session startled the investors. For big investors, the market stabilization measures created a win-win situation. The local analysts believe that the measures have been taken to put a floor under the free fall of the market. Some local analysts however doubt the genuineness of the buying euphoria in single-day session and unexpected overnight change in major rules. They see the sudden recovery of market as 'manipulated'. A distorted market with no concept of free trading is regulated through revision of lower and upper circuit breakers to make it a buying market and leaving little option for selling. On the other hand such regulations are not practiced in those markets, which move on fundamentals, according to analysts.

Local traders and brokers had expressed their suspicions and anger at the belated intervention by the KSE and SECP, as market was fast falling since April 18. They allege that the new rules have been engineered to facilitate major players, who would be able to buy the stocks at attractively low levels. On the other hand, the small investors have virtually lost all of their savings invested in the share business. Director Karachi Stock Exchange (KSE) has however strongly denied any kind of manipulation to take the stocks to new heights. Critics point out that political uncertainty has so far been given by stock market players as the main reason behind the decline in the market. While they wonder that the situation on political front has not improved but worsened with the disqualification of former prime minister Nawaz Sharif for by-election by the court, they see something suspicious behind all this game. They believe that the latest measures are aimed at pulling the big funds and big investors out from the trap they have fallen in the last crash.

KSE 100 share index witnessed bearish sentiments and lost its positive momentum on 27 June due to lower lock of one per cent, rollover week pressure and falling rupee value against the dollar, political and economic uncertainty, according to the local analysts. The political uncertainty has been driving the markets down for the last two months. Some analysts blame the present coalition government for not focusing on the economy. The government authorities are focusing more on politics and have invested their time and energies to resolve the issue of deposed judges, according to analysts. Even after general elections of February 18 and installation of new coalition government, Pakistan is facing a political crisis.

In its report published this month, the Citigroup Global Markets Asia Pacific ranked Pakistan as the most attractively valued in Asia. According to the report, Pakistan has the shortest "equity duration" in Asia excluding Japan with a payback period of 15.8 years or yield of 6.3 per cent. Other Asian stock markets with attractive profiles include Taiwan with a payback period of 22 years and the Philippines with a payback of 23.7 years. India with equity duration of almost 73 years is the most expensive market in the region. The report however contends that comparatively cheap Pakistan's market valuation does not necessarily mean that the investor should jump in. The other way round one could read this valuation measure is that Pakistan's economic outlook is highly uncertain which is why investors have marked down stock prices, thereby, demanding a faster payback. The low payback for the Pakistan market may well signify the concerns investors have about Pakistan's future economic direction.

It is the political uncertainty that has actually brought turmoil in currency and stock markets of the country. The local analysts have valued Pakistani equities at the P/E ratio of 12 without the political uncertainty and they forecast an earning growth of 15 per cent in 2009, compared with negative returns in G-7 countries and 10 times in the Asian markets.