KARACHI, March 12: The KSE index is flawed. Of the 100 shares in the index, as few as can be counted on finger tips of one hand can turn the tide one way or the other. Among them, share in Oil & Gas Development Company Limited (OGDC) stands out as the unchallenged giant.

Here is a sample: On Tuesday the eighth, KSE-100 index recorded historical highest single day rise of 355.20 points; the index galvanizing from 8863 to 9218.

Everyone cheered by the dizzy heights at which the Pakistani capital market had scaled. But was that so? That day shares in 386 companies came up for trading of which values in 59 remained unchanged. One would presume that all the remaining rose; that, though was not the case. If 165 shares gained value, almost an equal number (162) of scrip ended on the losing side. Looking at it another way: Investors in 165 shares made money out of their stocks that day while those in about an equal number went home, relieved of some of the cash.

Yet, the Index on March 8, posted the highest ever single day gain of 355 points. OGDC was not at its best that day and its value increased by Rs9.90. That meant its contribution of no less than 185 points to the index rise. How that figure has been worked out, would be discussed a little later.

If the index is flawed, one should scarcely be amazed by the deafening silence of the government; the corporate regulators and bigger stake holders; it suits them all. The great anomaly in the composition of index that shows the market soaring, when it is not, makes the government comfortable as the world watches mercury rising in the barometer (stock market) so as to prove the 8 per cent plus growth in the economy; it suits the Securities and Exchange Commission of Pakistan (SECP) the chief regulator for what else can be a clearer proof of the effectiveness of its first and second generation reforms; it suits the Karachi Stock Exchange (KSE) for if the index has already jumped 45 per cent in only two months and a half this calendar year, compared to a rise of 39 per cent in all of 2004, the bourse has a valid reason to proclaim to be the “best performing stock market in the world”.

And of course it suits the stock broker fraternity for looking up at the index shoot through the roof, more and more small investors would run up to the market to make a quick buck. Would they lose their hard earned savings? May be, but the broker, nonetheless, would earn his commission either way.

So the KSE-100 index is blatantly unrepresentative of the market. All the parties criticised above (if they do indeed read this piece) are likely to come charging forward defending the Index and its fairness and transparency. But no one doubts the transparency of the index composition; just the methodology.

Generally speaking, KSE-100 is a market capitalization based index designed back in 1991. All the world has changed since. For fairer display of market performance, it is essential to study global trends. In many markets around the world, one or two stocks are not allowed to rule the roost. By contrast, at our KSE, one stock determines the path of the index: the OGDC.

An illuminating report prepared by analysts at Jahangir Siddiqui Capital Markets Limited explains how?

The Report notes that the bull-run at the local bourses started at the beginning of 2002 when the benchmark KSE-100 Index was at 1,273 points. Over the period 2002-2004, the Index has yielded an average annual return of 72 per cent and the year 2005 is the fourth year in a row of this bullish trend. However, this 2005 rally is abnormal in the way that the Index has already gained 3,356 points since December 31, 2004 – a 54pc increase.

The important feature in this rally is that it is not broad-based and the Index remains biased to one high cap stock. “OGDCL contributed two-third to the Index increase”, say the JSCM analysts, adding that their calculations showed that OGDCL stood out as the major contributor accounting for increase of approximately 2,300 points (68pc) out of the overall 3,356 points jump since the beginning of the current calendar year. The share price of OGDCL in 2005 to date has surged by 117pc to Rs163. In comparison, KSE index has gained 54 per cent.

The analysts point out that based on current prices, the weightage of OGDCL in Index has gained 1,300bps to 33pc as against 20pc at beginning of the year.

The share of OGDCL in the Index since its induction in April 2004 ranged between 22-23pc up until Dec. 2004. JSML analysts have also calculated impact of movement in OGDCL’s price on the KSE index. They explain this as follows: Presently in absolute term, keeping share prices of other 99 scrips as constant, a Re1 (0.6pc) change in OGDCL price causes Index to shuffle by 18-19 points (0.20pc). At the beginning of the year 2005 when OGDCL price was Rs75, a Re1 (1.3pc) change was causing the Index to change by 16 points (0.25pc). PTCL, PSO and NBP contributed approximately 17pc in the Index rise.

JSCML report maintains that the general perception among investors suggests that the recent rally has been evenly led by the top market capitalization companies including OGDCL, PTCL, PSO and NBP.

However, a closer look shows that excluding OGDCL, the other three top capitalisation companies (PTCL, PSO and NBP having a cumulative share of 23pc in Index) have contributed only 570 points in the aggregate 3,356 points that the index shows to have gained since the start of the current calendar year.