STOCK MARKET MOVEMENT -REFLEX ACTION TO OUR ECONOMIC DECISIONS
SHAMSUL GHANI (firstname.lastname@example.org)
July 14 - 20, 2008
Besides giving investors a chance to burn their fingers, the stock exchanges give the economic and finance mangers an option to integrate actions towards positive achievement of country's economic goals. These exchanges are the barometer of economy and speedometer of country's economic progress.
At the stock exchange, share prices rise and fall depending largely on market forces. Share prices tend to rise or remain stable when the corporate sector and the economy are performing well. These are the periods of stability and growth. On the other hand, an economic or financial crisis triggered either by country's political turmoil or any other destabilizing factor could eventually lead to a stock market crash. Therefore, the movement of share prices and in general of the stock indices can be an indicator of the general state of country's economy. Our economy is presently in shambles, courtesy self-indicted political destabilization brought about during the year 2007. KSE-100 index, after touching the all time high of 16,000 has dropped to 11,773 as of July 10, 2008. Market capitalization to listed capital ratio of 7 (three months back) has dropped to 5.17. Foreign portfolio investment, after playing its due role during the stability period, has taken wings. Foreign investment never flourishes in the atmosphere of economic uncertainties. It leaves swiftly but takes a comparatively longer period to make a comeback even after the situation takes a positive turn. The following comparative progress table shows a complete picture of how stock market progressed during the last four years and then suddenly took a nose dive during the second quarter of 2008.
Total No of listed companies
Total listed capital Million Rs.
Total market capitalization Million Rs.
KSE 100 Index
KSE 30 Index
KSE All Share Index
New companies listed during the year
Listed capital of new companies Million Rs.
New debt instruments listed during the year
Listed capital of new debt instruments Mill. Rs.
Average daily turnover Million shares
Average value of daily turnover Million Rs.
Average daily turnover (future) Million shares
Avg. value of daily turnover (future)Million Rs.
THE PSYCHE OF STOCK-MONEY
Michael Rowbotham in his book "The Grip of Death" writes:
"Stock markets - institutions whose prime purpose was once to fund industrial investment - have degenerated into arenas of predatory, volatile speculation, engaged in the parasitic extraction of wealth from the productive economy, where the profit drives, not from a maturing productive investment, but from wild fluctuations in asset values".
A certain portion of stock market money takes the shape of maturing productive investment and, there being no alternative productive avenue of investment, remains invested in the market even during the crisis situations. However, a major portion of stock market money has speculative bearings and is solely employed for quick profiteering. Domestic or foreign, such money is ultra smart and recognizes coming changes from a distance. Never prepared to take a chance, the managers managing such funds, make a swift exit from the market. The foreign fund managers enter a different region with better economic environment while the local fund managers enter another sector of domestic economy with a potential to accommodate speculative investment. Developing economies usually have a number of sectors - real estate, currency, metals, food etc. that welcome speculative money with open arms. The targeted sector suddenly finds itself lush with speculative money and starts experiencing a managed boom situation. Once the sector is heated to the potential, speculative investment finds exit to another sector. The sufferers are the common man and the economy. During the crash of March 2005, the year high-low difference of 4100 points saw stock market money diverted to real estate sector. What happened afterwards is history. After managing the real estate sector boom, the speculative money again re-entered stock market and the KSE-100 index shot up to a historically high level. The stock market has again shed more than 4000 points and the domestic portion of speculative money has entered currency, gold and food markets portending more miseries for the common man and the economy. The dollar remaining stable at Rs.60/- for many years, has suddenly shot up to Rs.74/- Gold and food prices have touched a record high level during a short period of three months.
The understanding of the psyche of stock market money is as important as the management of this elusive market. In the first place the market should not be allowed to soar as high as to threaten the economy with an impending crash. The growth should be sustainable, broad based and supported with sufficient capital formation. The speculative money leaving a crashing stock market bites twice. It destabilizes the economy first by making exit from the stock market and then by entering another sector of the economy with the objective to destabilize it too in due course of time.