For the last several years, the month of May has been described as the most dangerous month for the equity markets in Pakistan.

Although there is no basis to this fear, it has been repeatedly seen that stocks take a dip with the beginning of summer, and especially the month of May is notoriously infamous for its big declines. This view has taken credence from the fact that for the last five years, the stock market does actually take a beating during the month of May, generally recovering later after the end of July.

The reasons for this phenomenon cannot really be identified. It may only be a matter of coincidence that stock exchanges face a crisis during the month of May, either due to factors affecting the country as a whole, or due to factors specific to the stock exchange. Nevertheless, there exists a belief amongst many players of the market that May is a time for retreat.

A plausible reason for the decline in equity values during the month of May can be the fact that the annual financial budget of Pakistan is announced at the beginning of June. The approaching budget at times causes various apprehensions regarding various sectors as well as the capital markets. Any expected changes or apprehensions may cause the investors to remain on the sidelines. The inherent tendency of investors to remain cautious rather than to take new risks takes its toll on the market.

The approaching year-end of several companies, particularly from the financial sector, in the month of June also compels leading financial institutions to remain away from undertaking new capital market operations or large portfolio adjustments. Moreover, there is a general decline in the availability of funds for both investment and financing of carry- over transaction (‘badla’ funds) in the market. These factors collectively put pressure on the market.

Apart from these ‘reasons’ about the market not performing well in the month of May, history itself bears witness to the fact that the KSE has taken a big dip in May every year since 1998. The following events occurred during the last five years that resulted in the poor performance of the Pakistan equity markets in the month of May:

In May 1998, as everyone would recall, India and Pakistan became nuclear powers. India detonated its atomic bomb on 13th May while Pakistan became a nuclear power on 28th May. The KSE index underwent a big decline during that time. Moreover, the market was already feeling the pinch of the IPP (Independent Power Producers) fiasco. The international sanctions, severe foreign exchange crisis and withering away of investor confidence meant that the KSE decline couldn’t be forestalled for a long time. The KSE 100 index tumbled from 1562 to 1040 points in a single month.

Again in May 1999 came the Indo-Pak issue of Kargil. The war-like situation not only caused a severe blow to the sanctions-hit Pakistan economy but also tarnished the image of the country as an investment friendly country.

The index didn’t actually fall during the month of May but no rally was seen in the market until December of that year. The slump in the market in 1999 had actually begun from April of that year. The relatively poor performance of the economy during that year also affected the fundamentals of several companies, as was reflected in poor pay-out ratios and consequently lower share prices.

In May 2000, excessive speculation and exceeding of exposure limits caused the default of a member of the Karachi Stock exchange. The market had to be shut down for some time in order to auction off the membership card of the broker and recover the dues. This default was triggered by a sudden change in the rules of outstanding shares acquired through carry-over financing, as well as changes in the exposure requirements. This resulted in the ‘dumping’ of several shares acquired through such financing. Shares like the Adamjee Insurance and the PSO fell like nine-pins, dragging down the market with them.

In May 2001 the market initially took a positive note but had taken a U-turn by the end of May. The market was gripped by a crisis that had originated by a change in the working procedures and clearing rules. T+3 was introduced while the weekly clearing system was abolished. Futures’ trading was also introduced and a ban was imposed on blank selling. All these actions were taken to check the tendency for speculation. However, it was speculation itself that brought the market down in May 2001.

Excessive speculation in the shares of World Call Communications led to the involvement of the National Accountability Bureau (NAB).The NAB suspected the involvement of embezzled funds from the Prudential Bank in the speculative run. This led to the suspension of trading at two leading brokerage houses, at the instructions of the NAB. Heavy selling was witnessed in the shares held by these brokerage houses to clear their outstanding positions. The confusion continued for some time and shook the entire market.

And now in May 2002, the KSE is again being influenced by the Indo-Pak crisis. First the suicide bomb blast on May 8th that resulted in the loss of several lives and then the tension on the border. The month of May had started with lacklustre trading and declining volumes, which culminated into a nose-dive when the external factors became unfavourable. So once again the hypothesis of May being a month to be concerned about, has been validated.

The market has seen intermittent periods of rise and fall. Generally the market has performed well during the beginning and end period of the year while the summer period has shown declines. True, the frequency of crisis in the May of every year is at a surprisingly high rate. Yet this doesn’t prove any basis for superstition. Fundamentally strong companies retain their upward potential and are not directly affected by the movement in their share prices. Investors going for a long-term position with a targeted rate of return do tend to achieve their goals.