STOCK MARKET DISASTER- A SEQUEL TO THE UNMANAGED DESTABILIZATION

IN ONE OF MY DECEMBER, 2007 ARTICLES, I HAD WRITTEN:

SHAMSUL GHANI (shams_ghani@hotmail.com)
July 14 - 20, 2008

"The upward drive of stock index augurs well for an emergent economy provided that the growth is broad based in terms of a consistent increase in the number of new listings, an expanding investor and industrial base, an evenly distributed increase in equity values and a sustained and sizeable growth in capital formation.

Unfortunately, when the growth is tested on aforementioned criteria, a good number of loose ends start raising their heads. It will be unfair to assume that the growth is totally based on speculative engineering or dependent on footloose global capital, yet some policy revamping job has to be undertaken to afford long term sustenance to the growth.

It will be observed that barring the month of November, 2007 when imposition of emergency caused a few jitters, the average per month rise in the KSE-100 index has been around 9 per cent during the months of August, September, October and December. This depicts an unusually high pace growth pattern and requires some stabilizing measures."

What happened afterwards is history. Instead of taking stabilizing majors, we did every thing possible to destabilize the economy. The mess we are now in has a foreboding of its own. The magnitude of market downslide is unprecedented in our history of stock trading. The market having flirted with the 16,000 mark a few months back has lost more than 4,000 points in a historically short period of time. More than one trillion of our economic wealth has evaporated in less than three months. Some say that the change in the lower circuit limit, which was reduced from five to one percent, has averted a bigger disaster. The foreign investors, however, have shown no faith in such gimmicks and have chosen to put their shutters down. The portfolio investment, once known to have a sizeable stake in our stock market, has ended up in a negative. The following table shows the rise and fall in the market capitalization.

TABLE -1

Rs. in million

 

2004 Year end

2005 Year end

2006 Year end

2007 Year end

Apr 15, 2008

July 07, 2008

Market capitalization

1,723,454

2,746,568

2,771,114

4,546,899

4,752,722

3,667,100

Change as compared to last period

772,008

1,023,114

24,546

1,775,785

205,823

(1,085,622)

% change as compared to last period

-

59%

1%

64.%

4.5%

(23)%

Investment and Commercial Banks account for 32 per cent of the total market capitalization whereas Oil and Gas Companies (both exploration and marketing) account for 25 per cent of the total market capitalization. The past increase in the size of market capitalization did not result from a broad based increase in the value of equities. Rather, it had been the outcome of narrow bull market operations. This should have been an area of concern for the controlling authorities who surprisingly failed to introduce meaningful stock market reforms to check unabated increase in the value of some equities with the result that higher-value equities trading at a higher P/E multiple got bigger dents. The following table shows the quantum fall in the value of few leading securities.

TABLE-2

NAME OF SCRIP

MARKET PRICE (RS.) DECEMBER 24, 2008 
KSE 100 INDEX 14,791

PRICE/EARNING MULTIPLE

MARKET PRICE (RS.) JULY 07, 2008 
KSE 100 INDEX 11,878

MCB Bank

429

17.6

310

Adamjee Insurance

385

19.4

260

PTCL

45

19.0

38

D.G Khan Cement

102

24.1

64

PSO

434

8.9

412

Shell Pakistan

437

11.2

457

Sui Southern Gas

28

16.1

27

I.C.I

209

18.5

158

Siemens Engineering

1,737

5.8

1,406

Engro Chemicals

279

21.3

270

Nishat Mills

112

9.3

82

WHO WILL TAKE THE BLAME?

The "Black Monday" of October 19, 1987 saw New York Stock Exchange's Dow Jones Index eroded by 22.6 per cent. The crisis was seen as more precipitous than the 1929 Great Crash of Black Thursday, October 24 and Black Tuesday, October 29, afterwards culminating in 1930's Great Depression. Our KSE-100 index has slipped down by more than 23 per cent during the last three months. The Black Monday of 1987 set the alarm bell for US economic and financial think tanks and world central bankers who clubbed together to bail out the country. The US central bankers spent a series of sleepless nights to put back the US economy on track. On the contrary, we seem quite unconcerned about the grim situation facing us and have resorted to window dressing measures.

The situation we are presently in was not brought about by force majeure. An otherwise stable economy was tempered with on purpose. Political considerations were allowed to override economic priorities. We have been punished by the market forces for destabilizing ourselves on mundane issues. The fast depleting exchange reserves, the weakening Rupee, the sinking stock market will take years to turn around and that too if we could halt the multi dimensional slide. It is not easy to re-build the confidence of jittery foreign investor who is under no obligation to block his investment in a strife ridden economy. Who will take the blame for knowingly inviting trouble_ the deposed government, the care-takers or the ruling coalition?

The following table shows the KSE-100 Index's record rise and unprecedented fall

TABLE- 3

MONTH

KSE-100 INDEX

% INCREASE /(DECREASE)

End December-06

10,040

-

End January-07

11,272

12.3

End February-07

11,180

(0.8)

End March-07

11,272

0.8

End April-07

12,370

9.7

End May-07

12,961

4.8

End June-07

13,772

6.3

End July-07

13,738

(0.2)

End August-07

12,214

11.1

End September-07

13,352

9.3

End October-07

14,320

7.2

End November-07

13,999

(4.1)

End December-07

14,076

7.9

End January-08

14,017

(0.4)

End February-08

14,934

6.5

End March-08

14,994

0.4

15 April -08

15,538

3.6

28 May -08

12,255

(21.1)

End June-08

12,289

0.3

07 July-08

11,878

(3.3)