Will the financial institutions re-enter the market in a big way on the buy side on Monday, is the question. Without them the stock market rally cannot take place and stop the slide, say the analysts. Trading can only take place in scrips if they do not drop down to lock position at the opening like they have done all of last week. Experts are confident that institutional buying will take place in selected scrips offering good valuation like PTCL, Bank of Punjab, Askari, Sui Northern, Engro and Fauji Fertiliser, D.G. Khan and Lucky Cement.
PSO will remain under pressure. However, the real problem is likely to remain in OGDC and PPL.
OGDC closed at Rs 136.45 on Friday. It is expected to go into lock position within minutes of opening and PPL is also likely to follow suit, say analysts.
Retail investors continue to be nervous. Out of 25,000 investors around 22,000 have lost on the exchange. This includes 8,000 Internet investors. Having lost heavily they appear to be in a bearish mood. The market will rally only if institutional buying can lead the way, say the experts.
Uncertainty will continue to hover until Wednesday when settlement of March Future Contracts takes place. "Even if the funding is fully arranged it will take a day or two for the clearing house to close the house for March contract in the clearing system," said an expert.
CRISIS: A dispassionate analysis of the whole crisis shows that it is a repeat of previous crisis when badla financiers all of a sudden withdrew the funds in a over-leveraged market - whether it was going up sharply or coming down - resulting in halting rollovers and forcing buyers to take delivery. "Until there are some rules in place to stop sudden withdrawal of funds from the badla market, this situation can repeat itself. The answer lies in having only a ready market. But then volume of trades would shrink drastically," explain the experts.
The big investors, after cashing out, started giving funds on the COT. By the time the market had reached its peak the Badla amount had bloated Rs 72 billion. All of a sudden heavy selling started on PPL. Badla financers, within a span of few days, pulled the rug under the feet of players who sold in the forward counter. Within days the figure dropped to Rs 22 billion. And, if Rs 6 billion is subtracted for deals among brokers the real figure for badla had dropped to Rs 17 billion, says an insider. In COT, 90 percent of transactions are rolled over and 10 percent take delivery. The sudden plunge in Badla amount, reversed the trend with institution in 90 percent of the cases asking clients to take delivery and 10 percent ready to roll over.
SELL-OFF: Most Mutual Funds became cautious when the KSE-100 Index crossed the 6500 level and started cashing out. Seeing them, other financial institutions followed as well. By 7000/7500 most of the big boys on the block had sold out. They held very selective scrips.
Since retail investors were making good profit the trick was to buy in the ready market and sell on the future market. With good news of high GDP growth and a positive sentiment a leading broker said, "sky is the limit". This started the rally. It was soon followed with the Regulator saying that PTCL would be sold at over $2 per share. Doses of daily good news started filtering in about oil and gas discoveries. One leading broker had cornered the National Bank scrip. Several banks announced good results for 2004. Analysts'' reports started floating saying banks will enjoy higher margins in 2005, therefore they will make more money in this year compared to 2004. All this started a huge rally in bank stocks.
Another broker, who has new interest in oil and gas exploration, pushed for energy stocks and a rally in OGDC and PPL commenced taking them to all-time high marks. All this helped cement, as well as fertiliser, stocks to also rise with genuine bull-run lasting 19 days.
The composition of KSE-100 Index based on market capitalisation became focus of investors. The heavy weightage enjoyed by OGDC, PSO and PTCL accounting for nearly 50 percent of the Index was misleading. "It should be composed on floating stock," said the brokers repeatedly. But investors in their greed ignored all warnings including by the MD KSE Moin Fudda when the KSE-100 Index was around 8300.
FUNDING: After offloading their stockholding, financial institutions and mutual funds became pure moneylenders on the market. The Badla rate, which used to average around 15 percent, went up at an unprecedented level, touching 1500 percent in Lahore, said an expert. The gap between ready and future market, which should reflect prevailing lending rates, increased to 80 percent.
All and sundry jumped on the bandwagon. They started focusing on the market instead of their core business. They ignored the people who had supplied them goods and services and instead transferred all their receivables as well as their bank credit including export re-finance towards the market. In a number of cases, some smart ones parked the profits in buying real estate - sending land prices to jump 100 to 300 percent in the last four months.
Banks indulged in REPO transactions with leading brokers who started financing their clients. In the process clients started shifting business to firms craving for higher margins as scrips moved up at a dazzling pace. The reporting system put in place by State Bank to spread the risk and restrict bank''s exposure to the equity market was conveniently bypassed with REPO contracts.
With number of scrips reducing from 30 to 11 on COT due to its phase-out - margin financing for client, at banks did not keep pace to replace the COT system. All warnings from responsible people fell on deaf ears. It was pure greed that grabbed them. Most of them had not seen so much money but had no idea of how they could lose it all. Some of them cashed out when KSE-100 Index was between 8000 and 9000 levels. But seeing no end to the bull-run, they came back not only with all the profit made thus far, but also whatever savings or leveraging they could arrange. When the tide turned they were shell-shocked. They could not sell as the market plummeted with no buyers. Trying to pay the margin calls they cannot even sell the real estate they have purchased recently as prices have also dropped by 35 percent, and there are no buyers. Deals not closed have been cancelled.
It will take time for the market to stabilise and the damage to investors'' confidence locally is immense but the long-term damage is the impact it has had on foreign investors who had just started looking this way. The violence that took place at the KSE last week has added to the damage.
The sale of imported luxury vehicles is also expected to receive a jolt. There are around 10,000 such vehicles parked for clearance at the Port. Buy orders have been converted to sell orders.
Valuations in most scrips are said to be at real or just below realistic valuation. The market is expected to drop by three figures on Monday in the morning. However, if institutions start buying of scrips, which are a bargain, it could take a slight turn by the afternoon.