KARACHI, Sept 16: The bankruptcy of the US investment banking giant Lehman Brothers and a ‘forced sale’ of Merrill Lynch, which sparked global stock market turmoil early in the week, sending Dow down to its seven-year low of 500 points, had little impact on the Karachi stock market on Monday and Tuesday.

Many market pundits handed down the idea that the ‘flooring system’ had saved the day.

The bear had already been prowling outside the Karachi Stock Exchange (KSE). Following the fall of 42 per cent in equity values in four months, from April to August, the KSE had set the ‘floor’ at 9,144 points on Aug 27 below which the index was restrained from falling. It was precisely for that reason that on Tuesday, the KSE-100 index shed just nine points, with trading in 138, of the 657 listed equities.

As the volume for the day dipped to less than 10 million shares, compared to last year’s average of 250 million shares, the trading hall wore a deserted look with only a few lone traders watching KATs terminal and some of the fasting oldies taking an afternoon nap to escape the heat outside. There wasn’t much worry over what was happening in developed and emerging markets and an agitated trader reasoned: “We have too much of our indigenous problems already on our mind.”

He growled: “Tell me if there is one encouraging sign on the political and economic front.” He thought that come hell and high water, things could not get worse than they already were.

But knowledgeable analysts thought that the Lehman, Merrill Lynch and the upcoming American International Group (AIG), all following other major collapses such as that of Bear Sterns, would increase risk aversion which would push back equities as a favoured asset class. Investors here, as elsewhere in the world, were likely to dump stocks and seek the safety of government bonds. “We believe once the price freeze is lifted (likely in October), more offloading by foreign funds could be witnessed, in case global market turmoil does not come to an end,” says Mohammad Sohail at JS Global.

In spite of substantial pull back, foreigners still held shares of the value of $2.3 billion (24 per cent of free float) of the KSE, he said. Other setbacks that the global meltdown could cause to the country included greater difficulty in raising funds through equity (global depository receipts) and debts (Eurobond, exchangeable and others).

“Moreover privatisation process will also be pushed back due to the incidents,” said Sohail.

He suggested that the biggest blow could be a severe slowdown in foreign direct and portfolio investments from US, which accounted for 18 per cent of FDI and 47 per cent of portfolio investment in the country as represented by the actual FY07 figures.Iqbal Ismail, a veteran stock pundit, conceded that the events had made it more difficult to raise liquidity from international markets. He recommended picking up the IMF package, which he thought would improve the twin deficits, help in stabilising the rupee and curb flight of capital. A banker moaned that the fall of investment banking giant in US had cast a shadow over investment banking industry all through the world, including Pakistan.

Nadeem Naqvi, who recently stepped down as CEO of AKD Securities to seek greener pastures held optimistic views. He said that if the ‘floor’ were to be removed, the market could drop by seven to eight per cent, which in comparative terms with the global markets’ plunge of five per cent in two days was bearable.

He said that the price of crude was receding; commodity prices were on the slide, which together should take some strain off the current account deficit. “Peak of inflation will pass through by the end of 2008,” he predicted, adding that he foresaw SBP to reduce interest rates in second half of 2009.

“In the short term, the government should pump the promised liquidity of Rs20 billion in the market, raised through institutions,” he suggested.

Nadeem argued that the global danger was not that of inflation but deflation, the latter giving rise to curb in demand and crashing prices as purchasing power dwindles.

He suggested that the great depression was a result of deflation, which the Federal Reserve would be able to avert.

“Pakistan would be affected in the sense that there would be slow demand for its exports.”

Muzammil Aslam, group economist at KASB Securities, says: “Ours is not an export driven economy, so if the meltdown has come, it is due to concerns on downgrade of earnings.”

He placed the current price-to-earnings multiple of Pakistani equities at 6.8 times forward earnings.

Unlike in India, Lehman had no presence in Pakistan. KASB had research collaboration agreement with Merrill Lynch, the other giant which sold itself to Bank of America for US$50 billion in order to escape the Lehman’s fate. Merrill Lynch had no equity stake in the KASB. The research franchise and corporate finance arrangement of KASB and BOA were likely to continue, which analysts thought would go to benefit the local brokerage firm.