KARACHI:Transactions at the country’s stock market are mostly taking place in hard cash, fuelled further following the drop in government bond yields.

“It is understandable for the small short-term investors to feel dizzy at the near all-time high index as they recall how the market crumbled like a house of cards at precisely such a level, leaving most retail investors penniless,” says a market guru.

Most stock strategists however, reminded that those ‘stock crises’ were triggered by the huge sum in leverage or ‘badla’— the purchase of stocks by investors on borrowed money.

“After the 2008 fall, the regulators in Pakistan have been cautious and the leveraged products have been restructured with strict margin and better risk management,” says Vahaj Ahmed at Topline Securities.

He observed that the overall leverage position was much smaller than what it used to be before 2009.

In 2007, when volumes were at record high at the Karachi Stock Exchange (KSE), official leverage (badla and futures) reached $1.5 billion, i.e. 10 per cent of free float and 2.5pc of market capitalisation. The figure does not include ‘undocumented leverage’ by brokers and bank financing.

“The reported leverage (MTS and futures open interest) is currently Rs7.3bn or $70 million which is 0.4pc of free float and 0.1pc of market capitalisation,” argues Vahaj, saying that though the market was currently at record high, the absolute leverage was down 2pc in last one week from Rs7.4bn (MTS Rs2.9bn and futures Rs4.5bn) to Rs7.3bn (MTS Rs3.1bn plus futures Rs4.2bn) even as the futures roll-over week had started.

In relative terms, it is down 10pc from 2014 average. Moreover, in spite of 4pc rally in stocks in last one month, futures open interest is down 9pc in absolute terms at the beginning of roll-over week, the analyst suggested.

Yet, one stock pundit said: “Whatever goes up must come down” and though no one can say if the index had hit the peak, it was better to remain on the side of caution.

Returns in stocks are surely mouth-watering. Vahaj at Topline calculates: “After posting annual gains of 49pc in both 2012 and 2013, Pakistani market is about to close its third year with ample gains. So far in 2014 (with only 27 trading sessions remaining), benchmark KSE-100 Index has provided returns of 25pc,” he asserts.

Published in Dawn, November 25th , 2014