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Stock market rally

August 18, 2012

THE Karachi stock market’s recent spectacular gains have left some feeling giddy. The sharp increases amid economic and political gloom are bringing back memories of 2008, when the market shot through the roof in a similar situation. Brokers are quick to remind us that this time things are different. Some point to ‘healthy profits’ being made, and the expectation of equally healthy dividend payouts. Others say that in 2008 leverage was strong, much of the investment in stocks was through borrowed money, and this time that favoured instrument of borrowing, ‘badla’ in brokers’ lingo, is outlawed. Others point to the higher-than-expected interest rate cut by the State Bank, saying that the money saved from debt-servicing cost will be available for shareholders instead.

Yet there is good reason to be cautious. It is worth recalling that the same brokers hyping up the present rally were also hyping up the 2008 rally till the very end. Indeed, it is a rarity to meet a stockbroker sceptical of these rallies, a fact that inspires scepticism itself. Pakistan’s stock markets are famous for the ‘suckers’ rallies’ and in every case, it is the small investor who loses at the end. Some of the claims made by the brokers do indeed ring true. It’s particularly important to note that this time round there are no specialised ‘business’ TV channels cheerleading the rally, and announcing dubious news with an eye to influencing investor behaviour on the trade floor. Most of the rally thus far has been centred on what they call ‘penny stocks’, small outfits that nobody had heard of until recently. It is hard to see how fundamentals are driving this surge, and small investors would be well advised to exercise caution. This could easily be another bull run that leads straight to the abattoir.