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Difficult to foretell stock market peak

February 03, 2013

KARACHI, Feb 2: Adding gain of two per cent in January, the Pakistani stocks have provided 51 per cent return or more than 50 paisa to a rupee to investors in the last 13 months.

But of greater interest is the fact that the bulls have continued the charge for the eight month in a row; the highest number of uninterrupted months of stock rise since the previous thrilling rally of an equally long period between Aug 2005 and March 2006 the only two such stock movements in over two decades, since 1991.

During January, the benchmark KSE-100 created two spectacular, but oppositive market movements. In one instance, the index nosedived by 525 points, the biggest single trading day decline in four-and-half years as the Supreme Court orders for arrest of sitting prime minister coincided with the fiery speech by new but controversial political phenomenon, Tahirul Qadri to a crowd of his loyal protesters.

And in the second, the index quickly bounced back by a huge 310 points on Jan 17, when the government managed to placate and disburse the protestors. The volatility during the month was at its peak, the index oscillating between 16,108 and 17.243 points. And understandably so.

On the last trading day, Friday, the KSE-100 index had settled at the height of 17,266 points. The index rise for each trading day in the past week, was mostly in two digits, the slowdown representing the difficult and exhausting climb.

Evidently, whatever goes up must come down. But no one can tell with absolute certainty how high the market peak is. Just as a corporate expert says: “There is no yardstick known to man which could gauge, when the market has become over-heated”.

But if one were to ponder on the several reasons for the unstinted run up in share prices, since January 2012, it may be possible to hazard a guess.

Following the negative return provided by the KSE in 2011, the brokers and investors had started to be increasingly restless and noisy. The chief regulator drew up proposals that could put the market back on the track.

The change of methodology in collection of Capital Gains Tax (CGT) centralised through the National Clearing Company of Pakistan (NCCPL) was undoubtedly a big sentiment booster. Together with it, the government incorporated in the Finance Bill, 2013 a provision that exempts investors from disclosing the source of money invested in stock market till June 2014.

Many market participants admit that the law could have channelled flood of liquidity into the market.

The second and equally significant reason for stock upswing, since the index touched the 12,000 points is the passing over the stick in the relay race, to the second and third tier (penny) stocks.

For months everyone is watching more than 80 per cent of the daily traded volume generated by low-priced shares in the cement and predominately the textile sectors.

The herd mentality is quite evident in the process, where investors with small means are pouring money into cheaper stocks, only because there is significant volatility and not necessarily because the company fundamentals warrant a ‘buy’.

In a free market it perhaps is not the job of the regulators to recommend a ‘buy’ or a ‘sell’ and the decision is entirely left to the investor under the guiding principle of ‘Caveat emptor’ buyer beware.Yet, as the scope of scrips in ‘penny stocks’ widen and trading in more and more companies is undertaken by larger number of unsuspecting buyers, it perhaps comes within the ambit of the regulatory framework to caution investors. There are reports of several penny-priced stocks of companies, which have long since disappeared lock, stock and barrel.

If the reason for the rally is the second, namely that undocumented wealth is being funneled through the stock exchange to change the colour from black to white, investors could rest assured that liquidity will drive the prices higher for as many more months as 17, till June 2014. But that is just a random thought.

According to market experts, politics, caretaker Government, elections, law and order situation, the Rupee parity, the Macros, corporate earnings and the IMF programme would determine the market direction going forward.