KSE in state of chaos

When the stock market index is rising, the players are buoyant and the officials, from top to bottom, have a cheerful look. But when the index starts nose-diving it is first termed profit taking. The second day fall is called a correction and if the erosion persists on the third day, the blame game starts.
Most of the time the television pundits attribute the fall to some news report and more often than not fingers are pointed at this newspaper, obviously because it happens to be the leading financial daily. What makes the KSE index move both ways is anybody's guess.
But one fact is certain that the movement is less dependent on economic fundamentals or companies' future profits and more on rumours and news leakages from within the listed companies.
Was the run-up of KSE index to the 12274 level on April 17th, with market capitalisation touching Rs 3,460 billion, warranted or unwarranted? In all probability unwarranted. When the pendulum swung an extra-mile, the backward swing was bound to be exaggerated as well. Islamabad should not be sensitive to downswings but should continue to do what is right for the economy.
The reduction of import duties on big cars in the last budget was a proper step to reduce the demand-supply gap. It has not impacted the sales of locally produced cars.
However, it has reduced, if not eliminated, the off the books premium earned by non-tax paying investors. Assemblers of 1600cc cars would have definitely felt a pinch, but after all the government has to play a balancing act of meeting consumer expectations and also creating conditions for employment generation. Similarly, the existence of a cement cartel is an acknowledged fact.
The decision to allow duty free imports has prompted the dealers to slash the premium over and above their commission. Local cement industry has the cushion to easily drive the cement importers out of the market by reducing the ex-factory price to below the landed cost of foreign cement.
Obviously, both these decisions would reduce the earnings of car assemblers and cement producers. Both these sectors have witnessed heavy investment in the last few years. Therefore, market players react to any policy changes as they did: Whatever affects their profits is a negative decision in their eyes.
In developed markets there is a wide range of choices for investors to get out from one sector to another and shift their investment from equities into bonds or commodities and even metals. Unfortunately in Pakistan the commodity exchange is a non-starter since it is managed by the stock exchanges.
And, even the Cotton Exchange, despite promises to re-start, remains dormant. Pakistani investors have only two choices - stocks or real estate. Gold and currencies are normally used to hedge against inflation.
The bond market has become the sacrificial lamb due lack of issuance of government paper by the government. The pretext for government inactivity is mishandling by State Bank of Pakistan improper marketing of the PIB's and allowing banks to hold them instead of acting as intermediary agents for sale to corporates.
Moreover, investment in equities has to be based on proper research and analysis. But in our country this is left on the wayside as conglomerates indulge in unsavory tactics. Big brokerage firms have a leg up on news from listed companies before it is available to general investors.
And the privatisation process has created conglomerates which unashamedly indulge in inter-company investments within the group managed by the same interests at the top, leaving minority shareholders in the cold.
As a consequence, market participants move in tandem in one direction with the big boys and suddenly are left stranded when the market takes a U-turn.
The so-called small investors are also not blameless. They continue to indulge in overleveraging and resort to panic selling when wrong-footed. Those who buy scrips within means can hold on, as values are bound to return to realistic levels.
Leveraging and short selling 'within limits' in futures is legitimate business as per the regulatory framework. But there is no check whether it is happening within fixed limits or not.
The cap on CFS (replacement of 'badla') continues to add to the uncertainty for leveraged investors. This is clearly evident from trading at the fag end every day. The index takes a dip as funding for trades is inadequate and uncertain.
Until the SECP puts the demutualisation process on fast track by quickly offering 40 percent equity to institutions and 20 percent to the general public, leaving the rest with member brokers, it would not attract the requisite talent for proper surveillance as well as risk assessment. In the present state of chaos quality managerial expertise from blue chip entities will not step forward to beef up the KSE management.