RISE AND FALL OF KSE

AROOJ ASGHAR (arooj.asghar@hotmail.com)
July 14 - 20, 2008

Pakistan's stock market has all the ingredients of making a financial fable with unexpected heights and falls, record-breaking numbers, and unfettered greed. It grabbed headlines because of its race to new highs on the back of a powerful economic recovery with stunning corporate profit growth. It captured the limelight in March 2005 & 2006, July, November & December 2007 and now since March 2008 when investors got heavy losses and the market crashed miserably. Pakistan's stock market started rising in early 2002 in the aftermath of 9/11. Economic performance improved, liquidity in the market rose, and investor confidence increased. Over the last few years, the benchmark Karachi Stock Exchange 100-share index rose from 1,273 to 15,000 whereas during the same period, market capitalization raised manifold. KSE 100 index has come down to 11,700 from over 15,000 in just four months, literally bankrupted lot many investors.

As everyone knows, political turbulence affects economic performance. Economic players don't like uncertainty; it makes difficult for them to reach informed judgments about the future. They are likely to wait out the turbulence. The government believes that the 7% rate of growth per annum since 2002 is the result of the way it managed the economy. Islamabad suggests that its policies have brought about a profound structural change in the economy which will take it towards a high growth path similar to the one being followed by other Asian countries. One determinant of growth that has received little attention is the promise of political stability. Like the 1960s Pakistan has experienced considerable political certainty over the last few years. This contributed to the expectation that there would not be any major changes in the nature of public policies affecting the economy. There was a widespread belief in the country that the political system presided over by President Pervez Musharraf would continue. The continuation in the system would ensure no surprises for the various players performing on the economic stage. The sudden rise of political Islam, the gathering storms in the tribal areas and the executive's confrontation with the judiciary have resulted in creating an enormous amount of political uncertainty.

KSE, once the best performers in Asia, is now in trouble. Pakistan's support of the U.S. led war on terrorism has attracted foreign aid and investment. Market analyst believe that market was due for a correction but of course not of this magnitude whereas it is difficult for investors to ignore the political situation because nobody knows who is actually governing the country, who is taking all the decisions and to whom one should contact in such a situation. It's a big question mark hanging over the economy.

If political stability was one of the determinants of good economic performance in the past, then the reverse effect must also be true. The turbulence that has hit the political field in the last 18 months will have a significant consequence for the health of the economy. The market was booming with the KSE-100 index was touching new all-time highs every few days. This steadfast bullish trend has little to do with the fundamentals of the economy, the state of the nation or the strength of listed companies. Clearly, the confidence of the market is not based on macroeconomic performance or the security situation in a country. Nor is it associated with the profits announced or dividends paid out by any particular company. There is an element of the speculation in bourse activity across the world. However, it is only in a few emerging markets that decision-making tends to be completely isolated from the ground realities. Pakistan's is once such case where speculation not only rules the market, but it also appears to be its sole occupation. This is particularly true in current situation where share price of number of companies are much below to their fair value (calculated by independent analysts)

In my personal opinion, it all started with a purpose by few people to pressurize new government, especially creating problems for previous Finance Minister Ishaq Dar, but later it went out of their hands too. Now, it is becoming quite evident that what is happening is not the result from the manipulation of the big stock brokers or any inadequacy of regulations. It is a consequence of the previous government's mismanagement. Along with local jobbers and speculators, foreign portfolio funds are also believed to have taken out millions of their investment in these months. It is expected that this trend will persist over the next few weeks rather months, unless state-owned and private institutional investors are forced by the government to intervene.

Every passing day, the situation is getting worst. Recently SECP changed the limits of upper and lower lock to 10% and 1% from 5% either way. Furthermore, short selling in July future contract has been disallowed. After this change, we saw a remarkable upside but it lasted only one and half session. Now the market is again on downward trend. Although the future market outlook is still unclear, but if government takes effective measures and concentrates on real issues then market might bounce back to stable mode even if not on the same position where it was earlier. Since take over of new government, continuous terrible moments were echoed in KSE as the political uncertainty continued to intensify by each passing day. There is almost complete exit of leading foreign investors but the disturbing factor is that local (small, medium and mutual funds) have opted for panic selling which has created most of the trouble.

Despite change in rules, the market confidence has failed to recover completely. Existing political developments and military action in Swat and few areas in FATA have raised concerns. Heavy panic selling at KSE led to the slide of benchmark KSE-100 Index which lost almost 4000 point in just 4 months. Unstable political and economic conditions of the country coupled with decreasing value of rupee shook the investors' confidence that opted for off loading their holdings. This week market started in the negative zone but some recovery was seen soon afterwards, however, investors later went for selling instead of taking new positions in the share market in view of the weakening economy and unstable political scenario. The rupee value of dollar also jumped to Rs73.7 which further strengthened the bearish trend.

Investors' perception was that sanity would return to stock trading after the February 18th national elections as the future government would be well in place to end the lawyers' agitation and will address other issues. But the government in its first 100 days does not have any single economic achievement except the control of suicide bombing which was a treat to foreign investor. Who knows from where these nut people come and who are these people controlling this genocide? In near term, it is better for small investor to wait and watch as the volumes have significantly dropped. Avoid entering in the market and hopefully in next 2 months time, things will start changing again. The healthy sign is that the good companies are being trading at lower than their fair price and they are performing. Thus the price of these companies will be adjusted upward soon. The current lower levels attained by most of the leading shares, however, provide bait for any prospective investor having strong holding capacity to make fresh investment but low volume figures leading them in pitter-patter about the future share market outlook. However, return of foreign investors may be further delayed until the political front is stabilized. Under the current political environment, macro-economic issues and uncertainty over change of rule by SECP, it is advisable for small, medium and large both local and foreign investors to strictly restrict themselves in only fundamentally attractive stocks and avoid participation in any speculation which is effectively not happening too.

PAKISTAN'S LIQUID FOREIGN RESERVES POSITION

The total liquid foreign reserves held by the country stood at $11,122.4 million on 5th July, 2008. The break-up of the foreign reserves position is as under:-

i) Foreign reserves held by the State Bank of Pakistan:

$8,323.8 million

ii) Net foreign reserves held by banks (other than SBP):

$2,798.6 million

iii) Total liquid foreign reserves:

$11,122.4 million