DOES STOCK MARKET CRISIS REFLECT ECONOMIC DISORDER?

POLICY PLANNERS AND REGULATORS NEED TO ADDRESS THE KEY ISSUES BY TAKING TIMELY AND APPROPRIATE STEPS

SHABBIR H. KAZMI
July 14 - 20, 2008

Pakistan remained the best performing market for nearly seven years mainly because the then economic managers were 'obsessed' with the stock market. They used to take pride in telling the world that stock market was the barometer of economic growth of the country. Privatization for people attracted investors to the equities market.

As against this the current economic managers consider stock market 'legacy of the previous government' and inadvertently ignores it. It seems to be focusing on 'popular policies' to attain political mileage but seems to be failing on this front because prices of all the commodities are skyrocketing and stock market has plunged to new low, both in terms of trading volume and market capitalization.

In the recent past interest of foreign investors/funds was too obvious in Pakistan but over the last 15 months SCRAs have virtually evaporated. Nothing has gone wrong on the economic front but political uncertainty, delay in strategic economic decision making and above all absence of any economic plan have cropped up many irritants.

Food and energy crises are not unique to Pakistan, in fact it is global issue and developed as well as developing countries are facing the brunt. In case of Pakistan these problems have become more contentious because the economic managers are 'too busy with non-issues' and paying least attention to the most serious challenges.

This is not simply an expression to undermine the efforts of the present government but a harsh reality. A lot of confusion regarding capital gain tax prevailed prior to the announcement of budget and investors liquidated their holdings to avoid the tax. While the market was experiencing 'distressed sales' policy planners kept mum and market was completely under the grip of rumours. The much desired came but by that time a lot of 'blood' had oozed out. Had the announcement come at appropriate time there would have been least damage.

It may not be wrong to say that the policy planners and the regulators often not only fail in reading the emerging crisis but their uttering creates more confusion. It was more than obvious that the downslide was a real concern but no move was made till most of the small investors lost their savings. When the erosion started to affect the 'big ones', then at their recommendations certain measures were introduced. It is being said that the measures introduced by the SECP, change in lower lock mechanism has saved the market from nosedive but has any one bothered to find out the reasons for the onslaught?

It may be said that policy planners, regulators and even the players were fully aware of the emerging crisis but wanted 'some one else' to come and save the market. It may also be said that market participants wanted the government to come up with a 'rescue' plan, similar to the one introduced few years back to save the investors of OGDC. At that time the money required was relatively low but this time it involved huge amount.

The institutional investors, particularly mutual funds and insurance companies were in deep trouble because at the end of 2007 they had booked huge capital gains and the prevailing prices required them to make huge provisions against diminishing value as the year ending 30th June 2008.

On the recommendations of market participants, who also have substantial stake in mutual funds, the SECP changed the lower/upper locks mechanism. The objective was to contain the erosion. While the change may have helped the mutual funds, it certainly was a disappointment for the day-traders, who generate bulk of the daily trading volume.

As the volume dried up brokers also felt the pinch, shrinking commission, therefore they once again started talking about protecting the small investors. One could not resist saying, "when all the small investors were dead vultures have come to eat their dead bodies". This also has the reference to the OGDC deal of the past. In that case investor of up to 100,000 shares was termed a small investor, interestingly the amount of this investment came to Rs 11,700,000, and such an investor certainly does not come under the category of small investor.

This time a pretty name is being given to the proposed fund and amount is as high as Rs 50 billion. It is also being said that it would only buy the shares from the small investors. It has been suggested that the Fund will buy shares of the companies covered by KSE-30 index. Is it not a fact that the Fund would pickup the blue chips at the lowest possible prices and makes huge capital gains in the future?

It is being apprehended that the big ones have pushed the small investors as well as the foreign funds out of the market and now they will buy at the lowest possible price. In the mean time a few Robinson Crusoe have been surfaced. Is it not a fact that brokers have been demanding capital gains tax exemption in the name of small investors?

It was estimated a few years ago that the number of small investors has crossed about half a million in Pakistan. However, now it is feared that the number has gone down considerably. One of the factors encouraging investors to pull their money out of stock market is persistent increase in return on National Savings Schemes. Depreciating value of rupee against dollar is also bringing back 'dollarization' culture in the country.

The current bearish trend is the result of a number of factors for which policy planners and regulators can be held responsible. The economic fundamentals of Pakistan are still strong and this has been subscribed by international players like Merrill Lynch. Is it not strange that foreign investors are still willing to invest in Pakistan but we are virtually pushing them out by creating law and order issues?

Let all the Pakistanis realize that many issues are being created by those who do not want this country to prosper. They also want to subjugate Pakistan by creating economic turmoil leading to anarchy and civil disobedience.

It is not the stock market crisis but the preamble of economic destabilization. Gone are the days when countries were conquered by deploying forces, now countries are weaken by upsetting economic stability and then working on regime change plan.