There is wisdom in the old adage ‘stock market is a barometer of the economy’, though how well the barometer functions depends on numerous factors.

The Karachi Stock market has witnessed a sharp drop of 9.5 per cent in KSE-100 index 10pc since February this year. That comes after three years of outperforming the regional markets and growth in benchmark index by 127pc. But skewed towards the heavyweight oil & gas and the banking sectors, the benchmark index is barely representative of the market.

Arif Habib, former chairman KSE points out that of the 10pc drop, almost half of it is the result of sharp decline in stocks on the oil & gas and banking sector, while the other half reflects stock performance in the remaining 22 sectors.

The oil & gas sector has borne the impact of a steep drop in international crude prices from $109 to $45 per barrel. Similarly the banking sector has seen shrinkage in spreads due to declining interest rates.

The slowdown in inflation paved way for the Central Bank to cut interest rates to 8pc. The shareholders in those two sectors had to bear the loss as the profitability of the underlying companies was expected to take a hit. In contrast, the heavy indebted companies such as those in the cement, textile and energy sectors benefitted from low interest rate environment.

The stock market performance is therefore not totally divorced of the country’s economic indicators. The reason that it does not take full brunt of the blow when the economy is in doldrums or enjoy the fruits of the economy’s return to health is the fewer number of listed companies and extremely low investor base.

There are only 560 listed companies out of the 70,000 registered companies. Ten companies listed on the pharmaceutical sector, say, is not representative of the 500 pharmaceutical companies operating in the country nor could a handful of textile mills with ample free float represent the fortunes of the entire textile sector.

It is thus a grievance of the small investors and market observers that only the high net-worth individuals are beneficiary of the upsurge in stock prices.

There are rare examples where even the investors with small means have turned from rags to riches.

The small investors in heavily discounted stocks in the textile and cement sectors have sometimes made fortunes. As an example, two years ago a pariah on the cement sector, Kohat Cement Limited stood quoted at just Rs8 per share.

It shot up to Rs180 per share, enriching investors in that scrip. Some of the biggest factors that eclipse the performance of listed companies and therefore the stock values are the informal sector; the tight shareholding by sponsors; the cooking of books and a small market easy to manipulate.

Published in Dawn March 22nd , 2015


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