KARACHI, Sept 3: At the end of last trading day on Friday, investment under the Continuous Funding System (CFS) —- an enlightened name for the very old ‘badla’ —- touched its peak at Rs24.97 billion.
That was just at a stone’s throw away from the upper side financing limit of Rs25 billion. When drained of liquidity in July-August, one principal demand of the market participants was an increase in the upper badla cap from Rs15 billion to Rs25 billion and the number of stocks in CFS from 7 to 14. The prime minister having come to the rescue granted that wish. And the stock values responded positively. In two weeks from August 22, when the bar for badla investment was raised, financing under that mode has doubled. But the market is now at the end of the road. The question is what next?
If some one at the Securities & Exchange Commission of Pakistan (SECP) —- the apex regulator or the Karachi Stock Exchange (KSE) —- the front line regulator has thought out a solution to the looming problem, they surely have not made it public. That, though is quite a remote probability for we are not given to thinking ahead of time.
But should the market players have bothered to waste time in searching an answer to such an awkward distant question, when it could be better employed in reaping gains at hand? In two weeks, the KSE-100 index galvanized by 478 points, with a 204 points rise only last week. One might suspect that the stakeholders are confident of a further increase in the financing cap, since the prime minister had graciously permitted the SECP-KSE teams to see him again in 10 days time, if there was another issue to be resolved.
“With official cap of Rs25 billion reached, leverage buyers would have to look for alternative avenues of financing as badla mode is now fully exhausted”, says Abdul Rasheed, Investment analyst at JS Capital Markets Limited. He presumed that some additional leveraging through futures market could be seen as current open interest was lower than historical levels. The analyst pointed out that in spite of higher investment, the weighted average badla rates had surprisingly declined by 140bps over the week to 16.5 per cent this Friday.
Khalid Iqbal Siddiqui, head of research at InvestCap said that the rate had slowly and gradually come down during the previous week owing to a greater amount of funds chasing the attractive rates of return on offer.
Analyst Anwar Ahmed Khan at Capital One Equities affirmed that the CSF financing hitting the ceiling showed a high appetite of new funds by investors for taking leverage positions. Abdul Rasheed at JSCM observed that given an option, most investors prefer to avail funding facility through badla market rather than utilize the derivatives market. That was in spite of a 540bps spread between badla and future market. “We believe this is due to lack of awareness about the derivatives market and higher margin requirement for trading in the futures market”, the analyst says.
‘Cost and carry’ rate, also commonly known as ready-future market spreads, was recorded at 11.1 per cent this Friday, with minor increase of 40bps during the week. However, with no incremental funding available through the badla market, that rate was expected to edge higher in the coming week. The analyst said that open interest value, which measured the gross outstanding leverage position in the future market, was recorded at Rs7.3 billion, higher by 35 per cent versus the level of Rs5.4 billion over previous week.
Mr Khalid observed that open interest in KSE stock futures contracts had swelled to Rs7.3bn on Friday (Sept 2), as against Rs5.4bn (September futures) seen on the earlier Friday (August 26). “The gradual rise in open interest was visible on a daily basis throughout the week, but stagnated toward the end of the week”, says the analyst, adding that the weighted average futures spread at KSE rose slightly from 10.5 per cent to 10.95 per cent on a weekend to weekend basis, signalling no problem with liquidity in the futures market.
Anwar Ahmed Khan at Capital One pointed out that among individual CFS stocks last week, significant buying interest was noted in OGDC, PTCL and POL. OGDC grabbed the first slot with average CFS investment of Rs5.7bn, 10.7 per cent higher than the previous week where the average CFS rate stood at 16.8 per cent. PTCL was next to follow with average CFS investment of Rs5.3bn and CFS rate up by 19.2pc from earlier week’s average rate of 16.5 per cent.
As the CFS investment is set to hit the upper cap of Rs25 billion on Monday, investors are anxious to see if the KSE-100 index would once again revert to moving in the range bound level between 7,600 to 7,800 points. That, surely, would do nobody any good and the market would be back to square one.
