KARACHI, Oct 20: Many people frowned at the 33 points rise in KSE share index during trading on Friday — only hours after the Karachi carnage. Some were expecting a mini-crash.

“It is disgusting to see such insensitivities of stock investors to a tragedy that took more than 140 lives in the city and the dead bodies were still being counted,” says a shopkeeper who had pulled shutters on Friday and Saturday.

But analysts argued that in the cold calculating world of finance, grief has to be set aside from market realities. “What looks like a paradoxical reaction actually makes sense,” says one analyst. The risks of riots, civil commotion and terrorism have been factored into the investors’ mind and so the share prices.

Greed of fabulous returns is what lures people to equity trading: “The question that investors ask themselves at times like these, is: “Would this incident fundamentally change the economy and hit corporate earnings? The answer in most cases is “No”, says a stock broker. So why must an investor dump his shares?

A few market participants even expressed sense of relief at the resilience of the Pakistani capital markets to terror attacks. Understandably all those traders and analysts who offered comments contrary to public perception wished to remain anonymous for fear of being cast out as the ugly ducklings.

A stock broker said that like everyone else, the market shares the sorrow, but it has to be realised that the incident has occurred when the KSE is already at the height of its bull-run with the index hitting its all-time high — and still rising”.

And the initial reaction of the market on Friday was as predictable. Share prices plummeted, but sanguine investors soon digested the implications of the horrific incident. As returns exceed the risks — with Pakistani equities trading at considerable discount to other emerging markets — the foreign investors did not stampede out of the market with flurry of sell orders.

That was quite in contrast to several years ago, when at times like these foreign investors behaved like a ‘panic prone herd’.

And at the inauguration of a joint-venture between a Pakistani conglomerate and a US company, a foreigner explained why: “Investors everywhere are now aware that these things can happen anywhere in the world, and they will not be put off by them”.

Worldwide, stock markets have started to develop resilience to terror attacks and even military invasions. A trader passed on some interesting information on the behaviour of the Dow on Wall Street in response to major catastrophes: “Following Hitler’s invasion into France, the Dow remained down for 795 trading days, or about 2-1/2 years. After the surprise attack on Pearl Harbor, the Dow did not recover for another 232 trading days (about one year).”

The next major shock to have a fairly protracted negative impact on the Dow was Iraq’s invasion into Kuwait when the Dow did not fully rebound for 134 trading days (about 7 months). After September 11, 2001, following the attacks for the first time on U.S. soil since War of 1812, the Dow recovered in just about 40 trading days (2 months).

Analysts believe that terrorism’s ability to instill fear in investors has been waning since the September 11, 2001 attacks.

Traders with an eye on international markets believe that the impact created by terrorism differs according to the country where the incident occurred. “Attacks in wealthier and more democratic countries result in larger negative share price reactions,” says one fund manager.

There is also a fundamental point. Long-term investor often does not react as quickly to bad news as does the day trader, and the former may even ride out the challenge. That reaction is based upon a fundamental basis to investing, where the investor relies more on that company’s net worth and future growth possibilities.

The day trader, on the other hand, often relies more on rumours and responds to information that arrives by the second.

The progress of technology has contributed significantly in containing the damage. Investors now have access to histories that can help define future market movements. A battle tested stock broker who still frequent the KSE recall not too distant future. “In late ’80s, when the city was placed under the grip of prolonged curfews to curb riots, the KSE hardly took notice and the index had kept up the climb, regardless of the street politics”, he says.

The reason: Those were the days when country’s financial fundamentals had started to look up and stocks were available at extremely cheap valuations, the broker explained.