KARACHI, Aug 28: Many (influential) market participants believe that having lost 15 per cent of their value since peak prices in March, shares at the Karachi Stock Exchange have all the right reasons to rebound.
With corporate earnings recording a substantial growth, stocks are now trading at attractive valuations of 10 times the 2008 earnings,” says an analyst.
“And if you sift the loss-making units from those earning profit, price-to-earnings (p/e) ratio will drop even lower at 8 to 9x”. But best of all, the fear of foreign investor deserting the market appears to have been stalled. The SCRA numbers with SBP show that during the last two days, foreign equity outflow has declined by around US$8 million to $188 million, from $196 million.A back-of-the-envelope calculation shows that the KSE-100 index has plunged by around 2,000 points from its all-time high of 14,132. That is about 15 per cent. In order to understand the crash, one must understand the cause.
Unlike the previous crises, where KSE itself or the regulators or big institutional players on the covert instructions of the government could and often did bail the market out, no one could this time put a floor under the fall. Most of the reasons for the KSE plunge earlier lined up by analysts, nonetheless, have fallen on the way side. The one that remains is “uncertainty” on the political front.
“Uncertainty,” as every stock market player knows is worse than bad news. But Arif Habib, stock broker-turned investment banker, has comfort to offer: “It is the “uncertainty,” which places discount on share prices,” he says and adds: “The same stocks would be on sale at premiums if there was “certainty.” He thinks that there is the silver-lining in all that.
“It would be near impossible for whichever government that comes into power to reverse the economic reforms.”
Other equity strategists hold somewhat similar views. After the recovery of the markets in US, Europe and Asia, the blame for the KSE downturn has shifted entirely to the “uncertainty” on the political front.
The market is starved of news that could give investors the confidence. But what sort of a news? A seal on the possible deal in London; A consensus on President with or without the uniform and the return of the pariah brothers?
The 86-point increase in the Index at close on Tuesday, buoyed investors sentiments. But most analysts caution that the rule of “caveat emptor” (buyer beware) still applies. There are reports of at least two stock brokers having gone bust; the auction of their KSE membership cards (each of which now bears a price tag of Rs70 million); margin calls and ‘forced sales’.
“Everything has been handled smoothly,” says an official at the KSE.
As with all market crashes, the greedy and speculators with disposition for ‘irrational exuberance’ must have lost money. One recalls that in 1987 Wall Street had seen the biggest crash in one day. The Dow then lost 22.6pc of its value or $500 billion on Oct 19, 1987. As investors began losing money, panic gained momentum. Everyone tried frantically to reach their brokers by phone and many, who could not, went over to the brokers’ offices and shot them in the foot. Now that certainly is not to give ideas to any of our unhappy local investors!