Many believe KSE will eventually stabilise

Last Thursday issues boiled over as small investors turned violent, smashing trading room doors of Karachi Stock Exchange, burning tires outside Islamabad Stock Exchange and blocking roads leading to Lahore Stock Exchange.
Business Recorder spoke to the players of the stock market - from a small investor to the director of a large trading house to hear their views about factors causing a negative impact on the bourses.
The root cause of many of the stock market's problems are rising prices of commodities in particular. Investors all agree that the meteoric rise in the price of oil is beyond the control of government of Pakistan, and foresee the prices of petroleum products at home to rise further.
Faisal Rajabali, director at Ali Husain Rajabali Limited says that because of the enormous trade gap facing the country, domestic prices will have to adjust for international inflation. He adds that because of the centrality of petroleum to the economy, rising costs will hit the Consumer Price Index hard and trigger the inflation we now see. Due to the resounding effect this international problem has on the national economy, one stockbroker added that the present government was partly a "victim of circumstance."
To combat inflation, the State Bank has adopted what Rajabali says is the standard global method to deal with the threat - increased interest rates. The SBP raised interest rates from 10.5 percent to 12 percent in May, lessening market liquidity significantly and leaving people with less money to invest in stocks, according to an investor at a securities company.
Umair Toufiq agrees, saying that KSE members take loans from banks but now have to do so at an increased cost. Also hurting small investors, Toufiq says, is the change in the upper and lower market locks recently. While previously the upper lock was at 10 percent of the market share and the lower at 1 percent, he mentions that the upper and lower locks are both now at 5 percent, increasing the potential daily losses for investors.
Another problem mentioned by many on KSE was the lack of foreign investors in the market of late. As Rajabali says, the market grew to 6000 points off local money, but the growth beyond that - till its high of 15676.34 in April this year - was due in large part to money from outside the country. While some was foreign investment, a large portion came from overseas Pakistanis as well as the return of Pakistani assets and capital kept outside the country.
Another trader agrees, saying that the previous government pushed this money into the financial sector through privatisation and IPOs and not into industries. He says since these funds weren't put into joint venture projects or long-term investments, the money remained relatively liquid and now considerable amounts are being withdrawn.
When the market became saturated, people began selling their capital and converting it into dollars. Rajabali concurs adding that this started a chain reaction as "no one wants to take a double hit in both the stock market and the currency market," but says that this further decreased demand for the rupee.
The recent international inflation has also contributed as people's buying power has been reduced, causing many of the foreign products and stocks coming in to Pakistan to face difficulty selling.
Along with discouraging others from investing this has also led to an increased flight of capital, particularly to Dubai. Faisal Rajabali estimates the selling on the market from capital flight to be almost US $1.5 billion, but adds that the local market will be able to absorb a large portion of this eventually. He adds ironically, that low interest rates caused many large companies to keep their money in fixed-income yielding investments where returns were better, leaving the money unavailable to immediately absorb the floating shares.
The largest factors impacting the market according to all those surveyed by Business Recorder, are political uncertainties and increased law and order issues. Most agree that to keep the country's economy strong more foreign investment is needed, but as an investor at a securities company commented, "there is no reason for them to invest" in KSE.
A small investor mentions the uncertain future of the president and deposed judges, a shaky government and a host of problems along the country's western border as just some of the problems causing anxiety for investors. A stockbroker elaborates saying if the government fights extremists, there are bombings in the cities, while if the government talks to them, there are warnings of strikes from others - both trouble the market. Rajabali agrees, adding that "security must come before the economy" and the lack of one hurts the other.
Many believe the KSE will eventually stabilise - albeit significantly lower and almost entirely off of local capital. Umair Toufiq supports the creation of a supporting fund to help other small investors, but adds that quick buying and selling by large-scale investors should also be restricted to stabilise the market.
An investor at a securities company is more skeptical of the fund, saying it will quickly be drained off by further capital flight. The director of Ali Husain Rajabali Limited, in contrast, favours the fund saying it can help those unable to sell. He adds, big dealers and local institutions are buying shares, but no one is currently absorbing the floating stocks of foreign investors, as "locals are waiting to see before buying, but foreigners are selling hyper-actively."
To further stabilise and turn around the dying economy though, a trader says action is needed. He says the government must improve security, increase exports and curb imports. Additionally, privatisation can bring in the foreign capital so needed at present and help the economy - and the people - generate income. As one investor ruefully remarks, "we can be the best country in the world... with planning, leadership and sincerity our potential is endless." For now, the investor, and the market continue to wait for this potential to actualise.