Monitoring analysts and analyses

Information asymmetry remains a main hurdle for investor base to grow at home. The fear of market manipulation by some has kept small ticket participants at bay. The losses booked in crises of 1998, 2005 and 2009 have swayed the respective fresh lot of investors from reentering the market.
One of the biggest impediments for young savers to find stock market a safe avenue to invest is biased calls by brokers. A few big houses have full-fledged research houses run by capable and certified analysts; but still practices of having buy/sell calls of stocks based on houses’ own position in respective stocks is prevalent.
A systematic counterstrategy to these manipulative practices is to increase the free float of stocks and that can be done by secondary offerings to public. Scrips like OGDC are now virtually impossible to be cornered due to its spread holdings. However, the stocks with limited free-float, irrespective of their fundamentals, can easily be manipulated by individuals or groups of brokers/punters.
The problem exacerbated with emergence of so-called gurus on social media. The charming personalities of individuals or apparent sophistication of groups having attractive websites and FB pages to lure small uninformed investors to follow them blindly.
Although, that does not undermine the benefit that could be accrued from social media to disseminate information. The point is that bogus or misleading information is worse than having no information. The need is to regulate the flow of information to separate genuine news/recommendation from the spurious ones.
There is emphasis of stock exchanges and regulators on inculcating the saving culture in the country. Saving rate in Pakistan is the lowest in the region – less than half of India. The low risk avenue of investment available in the county are fixed income instruments but that is in conflict with religious beliefs of many – that is why deposit to GDP ratio is abysmally low in the country.
The other reason for low penetration of financial assets is inherit undocumented nature of the economy and that is why the only investment opportunity deemed fit by many is real estate. But the investment size, especially in clean title areas, is too high to exclude majority. Why can’t they invest in stock market where investment size can be as small as Rs10,000?
The option to invest in equity market directly or indirectly through mutual funds is Islamic for many sectors in true sense but yet the industry fails to penetrate. There is dearth of schemes to offer to small investors, especially for those who don’t reside in big cities.
The equity investors in total are 200K for a population of 200 million with active investors around 15-20K. That is too low a number and calls for joint efforts from all the stakeholders to increase the penetration. There are researches in the world to support that housewives can be more prudent and successful, in the long run, than fund managers. How many housewives invest in stock market here?
The problem is low confidence of average potential investor in the stock market and that is primarily driven by suspicion on the stock brokers and investment advisors available to them. The regulator has been working on this long. In the boom of 2000s, the volumes of stock market picked up with new investors coming into the market but the euphoria was primarily run by high leverage with little check. 2005 crisis was a warning to mend; but the market players didn’t learn and had to go through worst ever crisis of 2008-9.
Now the leverage issue has been largely resolved but the volumes have been compromised in the process. The brokerage firms have cut their overheads. Unfortunately, quality research got compromised in the process as research function is deemed to be a cost center with no or little revenue generation.
In the process, a few analysts, moved to sales or even some own their own houses now. The halls of fame of these were their analysis. They frequently are being quoted in news reports and give comments on TV shows. People follow them but there is a conflict of interest. They want to create volume by frequent buy and sell to increase brokerage revenues. A more serious issue is to make calls on stocks favouring their position i.e. accumulate a stock at low price and then come up with report to buy it and once people start buying it prices will increase and they offload their holding in the process and consequently price fall.
That is called ‘gola’ in local market. The gola can be inter day or with a span of weeks or months. SECP has kept an eye on such practices and has penalized a few on fronts running and other such practices but there was no clear regulation for research analysts. The problem becomes worse by having totally unregulated advisors or gurus on social media, those are even providing wrong information on companies’ notices.
SECP has taken serious notes on these exceptions and have come up with new set of rules and regulations to counter such practices. These changes are welcome and let’s hope that these are implemented in letter and spirit.