On August 27, 2008 Karachi Stock Exchange started its dance with disaster by putting a floor under the market. The reason for this extraordinary decision was sharp decline in the prices of shares and its implication on financial system.
While the management and the regulators scratch their heads to find ways to kick-start the market, the hole we have dug up keeps getting deeper and deeper. We already have a casualty in the shape of our mutual and income fund industry, both died the day they stopped redemption.
To give you an example of how fast things are deteriorating, on August 27th, 2008 when our brilliant financial managers put a floor on our exchange the Dow Jones was at 11,502.51 points, while crude oil was being traded at 118.51 USD. Today Dow is at 7997 points and crude oil is being traded at USD 52 per barrel. In our country the SBP discount rate was 13%, it stands now at 15%. We are now standing paralysed in front of a fast moving train.
Appetite for risky assets world over is falling almost on daily basis and Pakistan is no exception. No matter what the brokers say on media about P/E ratio or Book Value etc whenever our stock exchange removes the floor nothing can stop its slide. Pakistan is a country where 40% of the population lives below poverty level.
It certainly cannot afford to dole out taxpayers hard earned money to rich stock brokers who have made billions. However, if the government - that is, taxpayers - are willing to bailout the stock brokers/investors, then this will have to be done in a way which does not give rise to any moral questions. For any bailout to be justified, stock valuation needs to be re-worked realistically and for that we need to remove the floor on urgent basis.