KARACHI, June 26: The Karachi Stock Exchange exhibited considerable volatility during the third-quarter FY03 (Jan- March), although the KSE-100 index closed the period up marginally over the end-December 2002 level, the Q3 Report of the State Bank of Pakistan released on Thursday observed.
The Report pointed out that initially, the market continued its Q2-FY03 rise based on ample market liquidity and improved economic fundamentals, registering a new all-time high of 2955.52 on January 16, 2003. “However, the vulnerability to unfavourable shocks was clearly visible in the rising share of speculative holdings in the market.”
The report stated that the rising speculation in the equity market was evident not only in the badla volume, but also in the high cost of this financing. In fact, the badla rate, which was already at 21 per cent at the beginning of the year, more than doubled to approximately 48 per cent by mid-January 2003 as brokers faced capital adequacy limits. This spike in the financing cost, together with a souring of investment sentiment, punctured the speculative bubble, the report stated.
It said that the ensuing sellout forced the KSE-100 index down a stunning 337 points from its January 16, 2003 peak — a 11.4 per cent decline in mere 5 days. Thereafter, the market continued to weaken gradually and eventually bottomed out by the end of February, around 2350-point levels.
However, market fundamentals pointed to a recovery. Firstly, the already attractive end-December 2002 market valuations looked even better following the January 2003 sell-off. Moreover, investor interest in equity market was reinforced by the continued liquidity injections into the economy and consequent decline in rupee interest rates. The latter not only contributed to an improvement in corporate earnings, it also increased the relative attraction of the equity market vis-a-vis alternative investments.
SBP stated that it was noteworthy that in recent years, the profitability of domestic corporates had risen steadily. In particular, FY02 profits appeared to have accelerated on account of low interest rates and a drop in cost of goods sold. The Q3- FY03 quarterly earnings data suggested that acceleration had not lost momentum as yet. “The results of a sample survey of 50 registered companies shows highly exceptional growth during the quarter under review,” the central bank stated, adding “albeit dominated by auto and financial sectors.” But average growth (even excluding those two sectors), stood at 47.3 per cent.
The SBP stated that March 2003, therefore, saw a renewed market rally, which recovered all ground lost in the earlier sell-off. As a result, the KSE-100 index registered an improvement of 359.24 points, from the Q3-FY03 low of 2356.47 points on February 27, 2003 to reach 2715.71 by end-March 2003 i.e marginally above end-December 2002 close.
SBP stated: “A distinguishing characteristic of this second rally was the substantial reduction in badla volumes. The average daily volume of 133.5 million shares during March 2003 was approximately half of that in January 2003,” SBP stated, adding that it could be gauged that in light of the relative absence of heavy speculative activity, the March 2003 rally was relatively robust.
Corporate Bond Market: According to the SBP Report, the listed corporate bond market was relatively more active during Q3-FY03 as compared to the preceding quarter as well as the corresponding period of FY02.
The quarter saw seven new issues worth Rs2.7 billion as compared to just three issues worth Rs2.2 billion in the previous quarter. With the issuance of those new instruments, the total amount of outstanding listed TFCs reached Rs27.4 billion—still only 4.7 per cent of equity market capitalization. The Bank stated that as customary, bulk of each TFC issue was privately placed, ahead of a limited IPO. “Of the total amount of TFCs issued during the quarter, only 22 per cent (Rs 0.58 billion) were offered in the IPOs. Again not surprisingly these meagre IPO offerings attracted bids amounting to Rs1.34 billion. This has given rise to the suspicion that issue (advisors) probably underestimated the demand for TFCs i.e. the issues were under priced (offered higher yield)”, the report said.