ISLAMABAD, June 6: The prevailing resilience of Pakistan’s capital market is unprecedented, if not unnatural, by all standards. The benchmark Karachi Stock Exchange Index that started its voyage from less than 3000 points seven years ago has gone well over 13,200 -- of course with some major shocks in March 2005 and April 2006. Today the market is continuing to climb, partly on the back of institutional support and largely due to heavy investments by foreigners.
There has been a phenomenal rise of nearly 30 per cent in the first five months of this year in the KSE-100 index which translates into an addition of Rs1 trillion in market capitalisation. Government attributes it to the success of its various economic, banking and capital market reforms. The market has multiplied the number of billionaires in the country.
“Where there were just a couple of billionaires jogging in a park with me in the morning, now I find over a dozen, all due to the blessings of big gains in stock trading,” says the president of a private bank in Karachi.
But the benefit has been limited. Not more than 200,000 investors, out of country’s population of 16 million trade in shares. The Karachi Stock Exchange -— country’s largest bourse -— is run by just 140 active stockbrokers who have grudgingly blocked the entry of new members through all these 60 years since the birth of the bourse. And almost half of the 35 million shares traded during any particular day happen to be in only 10 active stocks, out of 657 listed shares.
Globally, markets rise on positive developments and fall on negative events. In Pakistan, however, the market is sustaining an abnormal rise even though political instability seems to be at its worse in seven years and real manufacturing growth remains significantly short of targets for the second year running. It is commonly perceived that the presence of Prime Minister Shaukat Aziz and his goodwill among global investors’ base and continued support to the local big fish, even in times of probes into market crash, is the key to an unprecedented bull run at the market.
Those who invest in stocks used to desert the market on rumours, minor hiccups and accidents even in small towns and cities of the country, but this time they have been shrugging off political uncertainties and the major judicial crisis across the country, in quest of making big fortunes in stocks. While the common man is watching the rise of stock values from the sidelines, the government declares it as a vote of confidence from public over its economic performance. Opposition attributes this buoyancy to speculation, artificial institutional support and economic indicators that are far from real.
That leaves a forest of question marks: Is this in reality a bubble that is going to burst anytime soon — before or after the federal budget 2007-08 — and take away every rupee out of the pocket of about 200,000 small investors as it did in the crash of March 2005? Is it the media revolution that has enabled small investors to see by themselves live on screens all minor and major events and huge processions across the country instead of relying on rumours? Is it the nexus between the stockbrokers and those running the government (as the opposition likes to describe) that has sustained the mighty rise? Or is it the bonanza associated with foreign investment that the local brokers consider judicial crisis, media curbs and even 40-plus killings in Karachi in just one day, as non-issues?
These are some of the questions making rounds these days. In times of such uncertainties, it must take a great leap of faith for new local investors with small means to enter the market. But most market analysts and economists by and large agree that foreign investors looking out for better yields are leading the drive because of excess global liquidity and in the process a select group of brokers is also earning the windfalls. They tend to give secondary but varying degree of weight to institutional support and co-relation between leading brokers and those in power. They also concede that local investors were not as aggressive in the market as the government may like the people to believe.According to a leading economist working with an international bank, Pakistani capital markets had never before seen such huge flow of liquidity into the equity market. A stock strategist said that the international investors looking for higher yields turned to emerging markets like Pakistan, Mongolia and Vietnam. As a result, when they place orders in Pakistan, their 10 or so counterparts start buying in large liquid scrips before meeting foreign demand and 30 or so relatively small but influential brokers also join the front running brokers for cashing in on foreign buying. “If one were to dig only slightly deeper, they would find countless cases of insider trading and front running in our markets,” says an ex-chairman of the SECP.
People who are in the know of things contend that in times of a major fall in the market, the government comes to the rescue and puts a floor under the fall by directing institutions like the NIT, EOBI and SLIC to start huge buying. One such market participant thought that it had happened twice in recent months -– after March 9 and May 12. The institutions started to absorb huge selling in a successful attempt to maintain market stability. They believed that local investment had declined in the last three months on the back of profit-taking ahead of federal budget. The foreign investors, on the other hand, look to have adopted the “see no evil, see no risk” strategy because they still earn better profits than 4.8 per cent on US Treasury bills, and in comparison with other emerging markets, Pakistani stocks are believed to be still trading at lower price-to-earnings (p/e) multiples.
Leading economist Dr A.R. Kamal said that the huge inflow of foreign portfolio was surprising. He explained that there was enough liquidity available and investment in real sectors was not at desirable levels, the alternatives like investing in real estate, dollar buying and car premiums and investment in banks and gold, had all lost their lustre. “The value of dollar was not appreciating, the stability of euro was still uncertain, imported cars have minimised premiums in locally manufactured automobile and real estate prices have stabilised or gone down, and hence stocks is the only profitable investment left,” Dr Kamal observed.
He, however, said the institutional buying could lead to a ‘bubble burst’ and take a heavy toll on not only the small investors but also the institutions themselves which were funded through the public money. The risk, he said, would be even higher if the man on whose instructions the institutions were making huge investments decided one fine morning to withdraw his own investment.
Ahsan Iqbal, a central leader of the Pakistan Muslim League (N), believes that stock market buoyancy was driven by external factors, including a shift of petro-dollar to Pakistan from the West in the post-9/11 period and had no relationship with real sectors of Pakistan’s economy or manufacturing sector growth. He said over $65 billion foreign inflows had come to Pakistan, including $25 billion from overseas Pakistani after 9/11; $15 billion buying by the State Bank; more than $10 billion in US-aid; $12 billion or so from multilaterals and $3-5 billion through privatisation.
He said the government was artificially pushing the stocks up by pumping in huge institutional funds. He argued that buoyancy in global markets was always driven by real sectors while Pakistani markets had historically been speculative in nature. He said that when the tables were turned, big players would already have left after surreptitiously selling their holdings while small investors would be left to bear the brunt of the fall. Many small investors shudder at the thought of the March 2005 crash when they had to sell all their belongings and most turned paupers.
Tanvir Abid, head of institutional sales at IGI-Securities, said that heavy foreign purchases were leading local buying because foreigners focussed more on continuity of economic policies than on day-to-day events, as they made slightly longer term investments and 16-17 per cent growth in market over the last few years was enough to lure them to the Pakistani equity markets. He said foreign investors had bought around $800 million worth of shares during the current year. He said that deep-pocket local investors had slightly shed their aggressive stance in the recent months.
He did not agree that institutional support was at the back of rising stock values, saying that institutions could not sustain buoyancy for such a long period. “I am cautious about the future outlook,” he said, because most of the briskly traded stocks in several sectors were overvalued at current levels and correction could be expected around pre- or post-budget time.
Chairman of the apex regulating body for capital markets, the Securities and Exchange Commission of Pakistan (SECP), Razi-ur-Rehman Khan, was not available for almost a week for official comment on the subject. He did not take calls on his mobile or send back a reply from his official phone despite repeated messages.
