KARACHI STOCK EXCHANGE

FEAR DISTORTS MARKETS

MULAZIM ALI KHOKHAR
Nov 03 - 09, 2008

The fear of loss has gripped our world. We fear the government's neglect of investment friendly policies, we fear the economic, political and sectarian instability, and we fear our own weaknesses without any regards for our strengths. Investors are indisposed of staying in the market.

The major liquidity crunch has infatuated our financial markets, along with economic slowdown. Thanks a million to un-even tight monetary policy and non-industrial-friendly fiscal policies of the existing Government. The measures have slopped industrial and banking earnings, decelerate economic & stock market activities. Today most of the foreign investors have bunked while others are trying their hard to follow the suite. Local investors are at logger heads to find out the opportunities to invest, as there is no shining avenue in this bleak economic outlook.

ASIAN EMERGING MARKETS

COUNTRIES

CHANGE SINCE AUG 27, 2008

2008 YTD

Korea

-52.5%

-68.2%

India

-46.6%

-66.2%

Indonesia

-46.1%

-58.3%

Taiwan

-39.0%

-48.0%

Thailand

-37.1%

-56.9%

Philippines

-30.8%

-54.6%

Malayasia

-24.1%

-45.3%

China

-21.7%

-62.8%

Pakistan

-5.8%

-50.7%

Source: Bloomberg

Karachi Stock Exchange after losing about 40% of its values (from the previous peak) has been freezed at 9144.93 points for the last two months and the management is still reluctant to start the normal trade.

Market activities have been very dull until very recently and the market volumes have gone down to their historical low at around 120 thousand shares per day, which were used to trade at around 5 million shares per day.

CFS rates have been hovering at their peaks; the average rates were 30% last week and 50% a week before. The rates have gone up amid liquidity concerns of the financiers and the condition doesn't seem improving in near future.

SCRA ACCOUNTS' FLOWS

MILLIONS US $

MONTHS

CUMULATIVE INFLOWS

CUMULATIVE OUTFLOWS

NET CUMULATIVE FLOW

Jan-08

192.64

293.77

-101.13

Feb-08

372.35

217.55

154.80

Mar-08

448.24

531.02

-82.78

Apr-08

463.95

366.48

97.47

May-08

255.87

449.42

-193.55

Jun-08

255.33

402.01

-146.68

Jul-08

110.20

260.06

-149.86

Aug-08

115.33

183.93

-68.60

Sep-08

55.77

101.80

-46.03

Up-to 27th Oct-08

26.46

49.13

-22.67

FY-08

4,449.91

4,682.02

-232.11

From Jan-Oct 27 08

2,296.14

2,855.16

-559.03

Special Convertible Rupee Accounts (SCRA) have shown continuous decline since start of the stock market crisis in May-08. We have witnessed average more than US $ 105 million outflow per month since then. It is further feared that about US$2 billion remaining foreign investment will be eager to find it way out of the market, which may prove to be disaster for the market.

WHAT JIGGLES INVESTOR CONFIDENCE?

I blame the policy makers, not only for distorting the smoothness of market performance but also mishandling the resulting liquidity crisis. After years of struggle we had become to be one of the largest economies and one of the most attractive Asian stock markets. But today we are the world's riskiest economies; where S&P has cut our debt ratings to CCC+ (seven levels below investment grade), foreign reserves have deteriorated to their lowest and the inflation has jumped to 30 year high.

South Asia's second-biggest economy needs $3.5 to $4.5 billion this year for debt and other payments, said Shaukat Tarin. Our failure to seek funds from our friends like Saudi Arabia, China, the U.S., and the World Bank has further eroded investor confidence.

ECONOMIC SCENARIO

Mitra is quoted saying that 'IMF loan is a last resort, but even this may not fully assure Pakistan of the ability to remain current over time on its external obligations'.

It is interesting to follow the IMF's policies for granting loan as the Fund has never allowed us stand on our own feet. Today IMF is insisting on 350 bps hike in SBP discount rate, withdrawal of subsidies, and reduction in the fiscal deficit to 3.5% of GDP for grant of about US $ 10 billion loan.

All of the requirements are intended to further slump in economic growth as:

* hike in discount rates will mean poison for the industries and lower tax collections for government and move stock investors to money market for short term gains.

* withdrawal of subsidies will hit the agriculture and individuals as Government pays high subsidies on DAP and electricity, and

* reduction in fiscal deficit means lower developmental expenditures which will hamper economic development.

Stock market, being the leading indicator of economy, will further slide down in this scenario.

IS THERE ANY SAVIOR?

The Government, Financial Institutions and market giants like AKD are themselves at their odds. They need to address lack of confidence, liquidity crisis and potential foreign sell-off. But, I don't witness any Robin Hood or economic hero to save us from the dilemma.

Recently, the Government has formed Rs. 20 billion fund managed by NIT of state owned companies i.e. OGDCL, PPL, SSGC, SNGPL, KAPCO and NBP. The companies have approximately 30% weight in the index. They have also formed a put option guarantee of Rs. 30 billion for the foreign investors against the 7 stocks (holding approximately US $ 1 billion in those stocks), which will be valid for a year.

It is also learnt through market rumors that banks have been forced by the SBP to provide liquidity to the system.

Still the Government has lacked to ensure implementation for a smooth transition of the packages. Alchemya Technologies, the local actuary, has been appointed as technical analyst for the packages. We hope the packages run smooth and provide some support for shaky investor confidence.

WHAT NEXT?

We should not be looking only for Government help as the situation requires every one to play their role. Financial Institutions, Corporate entities, Individual, Brokerage houses and market giants need to make informed decision and play positive part. Market is strong at fundamentals which may be confirmed by the quarterly results recently announced. Most of the companies are still earning profits and paying decent dividends. As I mentioned earlier it's only the fear which distorts our markets.

In this scenario companies should buy-back their shares as the market has over-discounted the prices, Government may help market with cross holding the share at market prices. This will provide the market with extra liquidity and provide the market with up-push when it is already under heavy pressure of down-pull.

Out of the feared local & foreign outflows from the market, the KSE-100 index is expected to lose further approximately 20% of its values. Analysts are predicting the market to touch 7,000 points once the normal trading commences.

WORD OF WISE

Bears are not expected to get their part of honey for quite some time from now. It would be better for anemic bears (investors) to stay out of the market for some period.