Mar 23 - 29, 2009

A review of the performance of Karachi Stock Exchange since March 2008 to date reveals some interesting facts. That includes the KSE-100 index touching all time high of 15,676 in April 2008 and plunging to a low of 4,815 in January 2009. Imposition of floor on 27 August virtually made it extremely difficult for an investor to take an exit, even if he/she was willing to take a hit. However, off market transactions proliferated and created new records. Then, due to the mounting external pressure, the floor was removed on 15 December. By the time dust started settling government-opposition row enhanced political uncertainty. The latest jolt has come in the form of imposition of fines on the three bourses by the Competitive Commission of Pakistan, currently headed by Khalid Mirza, an ex-chairman of the Securities and Exchange Commission of Pakistan.

After the acceptance of general election results by all and sundry and installation of an elected government, it was believed that the new incumbent would ensure continuity of economic policy but the first jolt was caused when the then finance minister Ishaq Dar started talking about fudging of figures by the government headed by ex-prime minister Shaukat Aziz. When the statement raised concerns, Dar conceded before the multilateral financial institutions to continue policies of Shaukat Aziz. However, by this time the dent has been caused.

By August 2008 many of the investors has lost their life savings and the brewing settlement crisis started hinting towards default of some of the leading brokers. While the brokers' fraternity showed least concern while investors were loosing money, when the question of their own survival rose, all of them joined hands and pleaded for imposition of floor. As the situation got from bad to worse some of the brokers, also pledged shares kept in investor accounts. Even that could not save a few and banks were prompt in possessing and selling the pledged shares. Many of the investors have not got these shares back, despite the KSE management and SECP assuring the investors 'the needful would be done shortly'.

As has been said repeatedly, stock market crises in Pakistan have always brewed because of bad conduct of the brokers and inability of the KSE management and SECP to take timely action. It may not be wrong to say that at the best regulators in Pakistan play the roles of fire fighter but completely fail in identifying the fire from where the smoke is coming. Even if one accepts that imposition of floor was need of the time, its prolongation for more than 100 days just cannot be condoned.

The recent decision of Competitive Commission puts salt on the wounds on investors, as it has come after three months of removal of the floor. The commission did not react when the floor was imposed, it kept mum while the floor was in place and it woke up three months after removal of the floor. The decision has also attracted criticism because of the huge disparity in fine imposed on the three stock exchanges.

Some of the critics do not mince their word and are openly saying, "It is victimization of the largest bourse contributing the highest amount towards national exchequer". Another disgruntled broker said, "It is the cost for daring to differ with the concept of demutualization of stock exchanges being initiated by Khalid Mirza, when he was chairman SECP".

Over the last one year equities market has borne the brunt of political uncertainty and lack of decision making but linking it with the global financial fiasco seems irrelevant. Foreign investors have pulled out their investment because of persistent downgrading of Pakistan's sovereign rating for which only the policy planners could be blamed, otherwise the corporate results have been 'too good' in the prevailing circumstances.

While around the world governments are injecting millions of dollars in the banking sector, Pakistani banks have remained immune largely. However, impairment cost and mounting NPLs became two monsters threatening their profitability. In such a prevailing scenario decision of the central bank, regarding impairment value and FSV provided a security wall. While the decision has attracted some criticism, an unusual situation demanded out of a box solution.

Companies belonging to oil and gas exploration and production, banking, fertilizer and cement manufacturers have posted better than expected results. Comparing 2008 profit of insurance companies with that of 2007 is not disappointing if investment income/capital gains are excluded. However, huge claims arising in 2007 and 2008 have not only impaired profitability of insurance companies but also resulted in enhanced re-insurance cost.

It is true that declining crude oil prices have resulted in 'inventory losses' for oil marketing companies but mounting 'circular debt' has not only caused huge dent in profitability of PSO but the entire oil and gas sector be it refineries or gas distribution companies.

Lately, mutual funds were found trespassing i.e. income funds investing in equities. However, lately SECP has issued circular asking the funds to rectify the situation and stick to the original mandate. This is likely to cause some difficulty for the time being, due to adjustments but it would benefit investors in the end.

Probability of 200 basis points reduction in discount rate in the forthcoming monetary policy announcement, easing of political turmoil and improving macroeconomic indicators hint recovery of investors' sentiments. During the week KSE-100 index has already improved by more than 10% and likely to register further gains.