Intervention by Karachi Stock Exchange (KSE) after revising the rules and on support from the Securities and Exchange Commission of Pakistan (SECP) helped change the complexion of trading and halted the meltdown in equity prices last week, which witnessed record largest single-session decline.
A very volatile week was witnessed whereby the index fell by around 1100 points or, 11.4 percent, in the first three days of the week, and 78 scrips (both in the ready and futures) closed at their 'lower circuit' on Wednesday June 14, 2006. Recovery of more than 840 points, or 9.4 percent, on the following two days emanated from the positive measures taken by SECP, which included: holding lower circuit breaker at 5 percent, putting temporary ban on short-selling in futures contracts, increasing the number of CFS-financed scrips from 14 to 30, and allowing 100 percent exposure (in approved securities) in futures contracts.
Sentiment remained bleak as the average daily volumes of the week were 117 million shares as compared to 163 million previously, depicting a decline of 28 percent.
According to reports, SECP has served notice to 40 LSE brokers, and has also issued notices to brokers in Karachi Stock Exchange. This news can create panic in the coming week. "We recommend investors to gauge fundamentally strong scrips for investment purpose."
The investors, punters who in the first three days lost heavily, were in some cases unable to take fresh positions when the market rose. It was a total bloodbath on the first 3 days and, after that, the market was unstoppable, going up like a rocket.
With two membership cards sold, and rumours of 4-5 more members almost in default, the market closed on the lower circuit for two consecutive days after the initial fall on Monday. The stock exchange called an urgent meeting on Wednesday evening and took a number of measures, which led to an unmitigated boom, said an analyst from Alfalah Securities. All major stocks were locked on upper circuit 2 days straight. Therefore, it was quite a scene when on two days the stocks were locked on the downside and then locked on the upside.
Most investors agreed that the market had reached an attractive level but sentiment was negative. There were talks of the market touching 8000 mark, with rumours of margin calls and banks selling their margin stocks.
The sentiment was such that investors with cash were not willing to put more funds in the stock market. On Wednesday, history was made. A major historical collapse was witnessed as the KSE-100 index plummeted by 548 points, or 5.9 percent, to close at the 8767-point level, thus breaching another psychological support of 9000 points.
This was, indeed, the maximum single-day decline ever, as the double lower circuit mechanism was applied on most shares.
An analyst from KASB Equities said that the invariable question was obviously whether the bottom had finally been hit. "While we believe that the worst is pretty much over, given that people have been burned, the restoration of investor confidence will take time and we believe the return to full volumes will be a gradual process."
The KSE is likely to enter a phase of consolidation with the immediate term trigger coming with result season in July. "In the meanwhile, given inarguably attractive valuations (the KSE is trading at 9.5x CY06 and 8.6x CY07 earnings), we believe the time is ripe to start rebuilding portfolios. We advise an accumulate strategy on stocks whose fundamentals remain intact while the slide down in prices has dragged them back into the undervalued zone. OGDC, POL, FFBL, NBP, BOP, NML, ICI, Packages, DGKC, Adamjee and Indus Motors remain our top picks. High yield defensive plays, like Hubco, Kapco, FFC and Unilever are also safe haven in these volatile times."
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