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The trouble with the stock market is that it is almost always impossible to precisely predict its peak.

The spectacular rise in share prices at the Karachi stock market is making headlines. As the electronic media flashes the breaking of another barrier in the path of the index’s vertical climb, the paltry number of investors, at around 0.4 million, has multiplied eight-fold.

All roads lead to the stock market, and brushing aside the agony of the crash of 2008, small retail investors are returning to the market in droves. Billions of rupees are being poured into the market on the hopes of making millions from rising stock prices.

Timid investors and fund managers who may have sought an exit at around 15,760 points — the previous high touched on April 20, 2008 following which stocks had suffered the massive plunge that eroded 55 per cent of their value in fewer than four months — must be regretting their decision.

The index has added another 6,517 points, or 30 per cent, to climb to an amazing level of 22,277 points. And it is still rising.

Although unable to tell how high stock prices may yet leap, pundits remind investors that anything that goes up must come down.

The current stock market boom began around 17 months back in January of last year, after the government conceded to the regulators’ and investors’ demand of restraining the taxmen from asking questions over the ‘source of funds invested in the stock market until June 2014’.

In addition to a mouthwatering 49 per cent return in 2012, stocks have already delivered a return of 24 per cent in the five months of the current year, with an incredible 15 per cent return recorded in just a single month of May — the highest monthly return in four years, since March 2009.

Also, due to growing small investor participation, the average daily volume of trade has crossed 600 million shares, which represents an eight-year high. Investors also cheer the change of government, widely believing the new setup to be more ‘business-friendly’.

Yet, it has to be conceded that the current rally is led by foreign investors. The year-to-date foreign portfolio inflow stands at $359 million. This includes the proceeds from the recent buyback of shares of Unilever Pakistan by its parent, Unilever Overseas.

Most knowledgeable market players are aware that Franklin Templeton Investments (FTI) is tightening its grip on the three most heavily weighted stocks in the index: OGDC, MCB and PPL.

These account for more than half of foreign investors’ stake in Pakistani equities. OGDC, the oil and gas exploration and production (E&P) giant, has more than a 15 per cent weightage in the index, which means that the rise and fall of a single rupee in its price accordingly results in an addition or deduction of 15 points in the index.

The stock, therefore, commands the power to set the direction of the market.

Now priced at an incredible Rs245 for each share of par value of Rs10, OGDC has been cornered by FTI. Everyone who knows the market recognises that if Mark Mobius, FTI’s fund manager, were to decide to quit, it would inevitably trigger selling across the board, precipitating a market crash. However, such an eventuality, most people believe, is unlikely to happen, knowing Mobius’ love for energy sector stocks.

The spectacular rise in the KSE-100 index, after it crossed the 17,000-point level, also owes itself to the sudden surge in stock prices of dead and dying penny stocks.

On most trading days, more than half of the top-10 volume leaders are the low-priced stocks. This could signify that small retail investors, who mostly dabble in such stocks, appear to be biting more than they can chew.

Analysts identify 15 such stocks, many of which had been lame ducks and dormant at the price of a few paisas, and that are now rallying five to ten times that price. The lead gainers include Southern Power Company, Japan Power Company, Dadabhoy Cement and Bank of Punjab.

Other small cap speculative stocks that have seized investors’ interest include Dewan Motors, Dewan Cement, Dewan Salman Fibre, Pace Pakistan, PIA, Flying Cement and Fauji Cement. Except for Lafarge Cement Company, none of these small stocks have yielded a dividend in five years.

Are small investors then dabbling in those speculative scrips that are likely be trapped when the tables are turned?

Most brokers and analysts are convinced that it is not the job of regulators to meddle in direct trading. “Investors who buy and sell stocks do so at their own risk and peril,” says a stock broker, before adding, “The rule of caveat emptor prevails”.

On the regional front, the Pakistani market has outperformed its peers. Bulls argue that the stock boom is not a ‘bubble,’ and is instead grounded in sound market fundamentals.

What makes the current rally different is that the ‘badla,’ which was the curse that sank the market in 2008 and caused crashes in 2005 and 2001, is no more.

High yield and attractive valuations are often quoted as the major allure for foreign investors. Corporate profits are on the rise, as almost all sectors are producing sound quarterly financial figures.

Profitability of the textile sector has taken a leap due to lower interest rates, an improvement in demand, and better retention levels for yarn and fabric.

Cement sales have increased by four per cent in the 11 months of the current financial year over the same time last year, and oil and gas E&P companies drilled 82 wells till May, around 50 per cent more than the previous year.

Analysts are also positive on fertilisers, as consumption grows with the growth in rural prosperity.

Updated Jun 10, 2013 02:38pm

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