KARACHI, June 13: Share prices fell further on the Karachi Stock Exchange on Tuesday, where the KSE-100 index plunged by a massive 418 points to close at the year’s lowest level of 9,315 points.
Including the drop of 117 points on Monday, the Index has nose-dived by 2,963 points (24pc) since the current bear spell began on April 17. In the 41 trading session since then, the market capitalisation has eroded by as much as Rs834 billion ($14bn). That is a worrisome state of affairs but the blunt of the blow has yet to come.
On Tuesday, of the 344 traded stocks, 282 ended in the red. But that is not as bad as what is to follow: As many as 78 of those stocks (in the ready and futures counter) closed at their ‘lower circuit’ and could not break the lock for one hour, which under the circuit mechanism regulation means that those could tumble by 10pc on Wednesday. In that worst case scenario, the index would lose another 800 to 900 points and unless the government stepped in to stem the rot, the free fall of the market had the potential to trim 25pc of stock values on Thursday.
Seemingly, disaster stares the market in the face. On Tuesday at the close of trading, everybody in authority seemed either to be groping for a way out or oblivious of the serious situation ahead. Chairman, Securities and Exchange Commission of Pakistan (SECP) Razi-ur-Rehman Khan, who descended on the KSE with a team of 15 interrogators to investigate “blank selling, short selling beyond permitted limits, misuse of CFS-financed shares and wash trades”, which the chief regulator suspected might be taking place at the KSE, designed to drive prices down, seemed to be at a loss on the course of action to stop the share fall.
At the close of market on Tuesday, when Dawn quizzed the chief regulator about the 5.4pc drop in two days and the possibility of a bloodbath on Wednesday, he commented: “I’ll see what can be done”.
Zaffar A. Khan, distinguished as being the first non-broker chairman to head the KSE board, said that it was not the function of the board to monitor day to day ups and downs of the market. “If any violation of the regulations takes place, the board will doubtless hold meeting and take appropriate action,” he said.
KSE managing director M.A. Lodhi stood his ground that there was no member default, margins were being monitored and collected in time; risk management measures were in place and clearing house was safe. He reiterated that sale of broker’s card was not a sign of default: “Each year 10 to 15 cards change hands, for various reasons, such as when the owner dies, retires, migrates or simply wants to cash in on prevailing high price”, he said.
Many of the senior brokers and analysts thought that the situation was grim. If the stocks fall continued unabated for two more days, they feared chances of heavy defaults. “The government must intervene, before the situation gets out of hand”, said a market player who asked not to be named.
Some analysts believed that high net worth individuals who had indulged in heavy leveraged business (in-house badla and share financing from banks) were trapped. “With no buyers and a continuous dip in the value of their portfolio, they could start defaulting on margin calls, which would impact not just the brokerage houses, but it could rock the boat of the banking sector, which would have financed clients for stock trading.” said a well-known stock strategist.
He thought that the way out were the same as in the previous crisis: brokers in distress should be identified and their portfolio purchased by interested parties, even if at substantial discounted values. That method was followed in cutting out a Lahore based broker, Nisar Danka, who was pulling the whole market to the bottom of the sea in the crisis of May 2002.
The other way out was for the government to form a consortium of banks, financial institutions and mutual funds to bail out the market. “An injection of Rs8 to 10 billion by some major institutions such as Employees Old Age Benefit Institution (EOBI); State Life Insurance (SLIC); National Bank (NBP) and National Investment Trust (NIT) could help to pull the market out of the current crisis”, said a market participant, adding that “at current attractive valuations, those institutions would not be the losers but would have struck a profitable deal in the long term”.
National Investment Trust (NIT), Pakistan’s largest mutual fund with Rs72bn under management was claimed to be safe and sound. Tariq Iqbal Khan, chairman NIT, said he had no cause to worry, for the simple reason that the Fund’s portfolio with a cost of Rs20bn, carried unrealised gains of Rs52bn. He said he did not foresee any drop in the profitability of NIT, which had posted earning per unit at Rs5.66 for the July-March three quarters. “NIT is in a comfortable position to distribute dividends for the quarter to close on June 30”, he said.
He debunked the theory that the potential bidders for NIT, which was up for privatisation, were behind the market crash. He reasoned that major brokerage houses and financial institutions who were interested in NIT buyout, would on an average have open positions of between Rs8 to 10bn. A 24pc dip in the index means they have already incurred a loss of Rs2bn. The maximum value of NIT has been assessed at Rs1.5 billion, which for each of the six parts in which the Fund would be sold off, would mean a value of Rs300 million, he said and queried: “Who would incur loss of Rs2bn today to seek asset of Rs300m, which he may or may not get at a future date?”
But while pessimism ruled the roost at the bourse on Tuesday, there were quite a sizeable number of market participants and analysts, who worked out on charts and graphs that the stocks could bottom out at the 9,300 level.
Every broker and his agent and each analyst and investor forwarded his own reasons for the market fall, to which others agreed in varying degrees: doubling of CVT; pull out of funds by foreign investors; dim last quarter results; lower ratings by international rating agencies; problems in the cement and sugar sectors; increase in NSC rates; fall out of the bear run in global equity markets and so on. But the one point on which everyone seemed to agree was that the investor confidence had been shattered. Was that beyond repair? That would depend on whether the regulators realise the gravity of the situation and find a quick fix solution.
