KARACHI, Nov 20: One of the major pitfalls for investors in the Karachi stock market, just as soon as the ‘floor’ is removed, would be to know what exactly is the price or ‘fair value’ of a particular stock that they hold. Unless an intelligent and informed assessment is available, small investors, in particular, are likely to dispose of their shares at throwaway prices in despair.

Market’s consensus view is that if some of the shares had risen to an unrealistic highs before the crash of April 20 from the index level of 15,676 points, those stocks are neither as cheap as ‘off-market’ transactions make us believe.

An investor’s jaw may drop just by staring at the off-market sale of MCB at as deeper discount as 55 per cent and PSO at 60 per cent to their ‘floor price’. But “off-market” deals do not mirror the true worth of a stock, since they are mostly the result of “distress sale.”

As despondency deepens, brokers, traders and analysts are passing on the word of how low a particular stock could begin its journey anew. Obviously, their estimation of downside is as low as suits their interests; the guesstimates over discounts are rising by the day: from 15 to 20 and even 30 per cent.

But market strategists admit that the price of shares should be grounded in fundamentals and not sentiments. They affirm that investors who are essentially a ‘panic prone’ herd, ought to know the ‘fundamental’ or ‘fair’ value of shares, otherwise, both they and the market would suffer. In order to dispel the ‘fear’ factor and arrest the market from another steep plunge, a few proposals are understood to be under the consideration of the Regulators.One proposal that makes lot of sense needs to be shared with the public. Forwarded by persons who must know the market inside out because of having served in various capacities relating to the equity markets at both the KSE and the SECP, the proposal underlines the need to gather a team of five to 10 top of the line equity research analysts.

“This panel may be given the task of developing consensus fair value of blue chip companies, such as those included in the KSE-30 Index.”

The consensus fair value, which would be based on facts and fundamentals, could be disseminated to the public prior to the removal of the floor. The proposal suggests: “The availability of these fair values will serve as reference points and it can be expected that the prices of securities will sustain at a level, which is in close proximity to those reference points.”

The logic behind the proposal could be found in the works of many renowned behavioural economists who argue that when forming estimates, people often start with some initial value and then adjust away from it, says the two-page proposal and it goes on to explain that people “anchor” too much on the initial value. If the panel of research analysts could provide investors with an initial value, which could be perceived to be the fair value of the security, investors would anchor their estimates based on those values.

“In that manner, the objective of keeping the market rational and efficient would be achieved,” the proposal says.

It also underscores the need to follow a certain discipline in implementation of the idea. One, that the research analysts should be independent. The “independence” of analysts being of paramount importance to ensure transparent and objective conduct of the study. Two, that the companies whose fair values would be determined by the panel of those wise men, could be requested by the KSE to conduct an ‘analysts briefing’ regarding their earning forecasts for the quarter ending Dec 31, 2008.

The analysts could also be briefed about the plans, progress and prognosis of the company about the future. The habit of providing ‘analysts’ briefing’ is fast catching up in our country and several multinational listed companies, in line with international best practices, regularly call analysts for an inter-action, which enables them to get a first-hand knowledge about the company from the corporate top bosses.

Armed with that and the chairman/ chief executive reports to the shareholders and accounting figures, the team of analysts could arrive at the true fundamental value of a company and its stock.

In a stabilised market, the actual value of most ‘blue chip’ stocks should be far higher than is represented by the ‘floored’ or the ‘off-market’ transactions. That knowledge when disseminated to the public, would give investors and the market the comfort that they seek. The proposal recommends selection of securities for the exercise, based on some objective criteria, such as securities included in the KSE-30 index, or those included in category ‘A’ of the CFS Mk-II Market.

History teaches us that after every stock market crash, prices tend to remain lower than their fundamentals for long periods. “The objective of the above exercise is not to change the sentiment prevailing in our capital markets, but to prevent the ‘irrational exuberance’ of the investors from driving share prices below their true fair value and thereby achieving the objective of efficient and fair capital market,” the proposal concludes.

The young, educated brains, receptive of enlightened ideas that are currently at the head of the KSE could give the proposal a deep thought and perhaps initiate the exercise, which many market participants said looked workable.