Karachi Stock Exchange held a late evening special session on Thursday to give an exit to weak and over-leveraged investors through an across-the-board offer on closing prices. Shares worth Rs 6.1 billion were reportedly offered, out of which Rs 4.25 billion were accepted.
The ease up in the selling pressure resulted in KSE-100 Index closing on a positive note. However, the KSE-30 index, consisting of high volume tradable shares, still remains in the negative territory and by and large most share prices are still at a distress level.
The offer to buy weak holders out was made by a large number of network brokers and mutual funds following Thursday's violent agitation by angry investors on the Karachi Stock Exchange in particular. Although, the present fall in KSE index is in line with other bourses in the region, the KSE behaviour in the past was never in line with other bourses. Even in times of negative political news, KSE share values went upward, as investors were confident of continuation of economic policy with President Musharraf continuing to be at the helm.
However, after the induction of an elected government, it dawned on the investors class that the country's economy is in deep trouble. The very investors who were critical of the media for spreading "negativism" were now hearing the same swan song from the government ministers. These investors were looking for an escapegoat and they found one in the State Bank of Pakistan's hike of policy rate.
Markets do over react, whether it is a bull or a bearish run. Therefore, long-term investors do not have fingers on trigger unlike the highly leveraged investors. KSE is a highly leveraged market. It is precisely for this reason that SECP and the KSE Board of Directors reduced the lower lock to one percent from five percent to ease the pressure of margin call on weak investors with a view to providing them time to raise the requisite funds to meet the call.
It remains to be seen whether or not the Thursday's effort of members/brokers will be sufficient to arrest the slide. At least, the institutions which were hesitant to enter the market for fear that the prices would go down further, now have a clue from the savvy investors who strongly believe that the yields at these prices are indeed at attractive levels.
SECP is still on the lookout for a market stabilisation fund. The objective is not to bail out brokers, but to arrest the slide which has more to do with bleak political outlook and geographical pressures on the borders than with the performance of listed companies. Government owned institutions, like NIT, SLIC and EOBI alone cannot provide the cushion SECP is looking for.
SECP needs banks to come forward to invest for longer periods and also absorb the likely selloff from foreign funds due to the country's weak forex position. It is, therefore, seeking a one time waiver from SBP's Prudential Regulations to enable some banks to participate in the long term stabilisation fund. At present, banks can invest up to 20 percent of their equity in the listed companies.
Obviously, SBP has to balance the risk between depositors interest and fear of a pullout of $3.5 billion invested by overseas funds, adversely impacting the forex reserves. Regulators are expected to have a better understanding as they have a better macro picture than the investors. The big boys controlling 60 percent of CFS (Badla) funds should not be allowed to manipulate and exploit a cheap selloff.
The liquidity shortage in the bourses has more to do with the flight of capital to the UAE and Canada and less to do with the monetary policy. Bourses and real estate are mainly funded from cash-in-circulation and less from bank deposits. The quantum and rise in cash-in-circulation - over one trillion rupees - is playing havoc with the economy. It needs to be reduced drastically and converted into bank deposits. That is the challenge our economic managers are facing now.