Three things are driving the Karachi stock market crazy: First, liquidity, second: liquidity and third, liquidity. It took almost ten years for the market to cross over the previous highest KSE-100 index mark of 4661 , but a fewer than four months to shoot up by 1500 points to the incredible level of 7000 points.
The wonder, nonetheless, is not why the index has shot through the roof, but the speed with which it has accomplished that feat. Have the stock prices shot up that high across the board or is there a flaw in the composition of index itself? Market strategists admit that it is a bit of both.
FIRST THE INDEX: The composition of KSE index is such that just two of the 100 shares in the index account for 34 per cent weight age: Oil and Gas Development Corporation (OGDC) -22 per cent and Pakistan Telecommunication Company Limited (PTCL)- 12 per cent.
All of that means that just a rupee rise in the value of those two stocks would add as many as 34 points to the index. A classic example of how much influence PTCL and OGDC exert on the index was witnessed this Thursday.
PTCL stock rose by Rs 4.60, which meant that it pushed the index up by 55 points. Overall the KSE-100 index closed 48 points higher. But that scarcely was a sign of the bullish onslaught, for the shares of most companies across the board had dropped like nine pins.
Were it not for the PTCL stock, the index would have closed 50 points down, instead of 48 points up. It can roughly be worked out that in the phenomenal rise of 1200 points in the KSE-100 index over the last three months, contribution of PTCL and OGDC accounted for 800 points and the other 400 points were added by the remaining 98 companies combined.
That is not really to suggest that the index is altogether misleading. It has been framed in a clear and transparent way and weightage of all 100 stocks fit their criteria.
But having said that, it also has to be seen if the index needs to be recomposed in a way that it encompasses aura of the broader market. An investor who looks up just at the rise and fall of index to make and investment decision is unintentionally misled.
Of course the principle of 'buyer beware' applies also to the share business, but most of the small investors who have rapidly multiplied from 100,000 to 800,000, can not all be expected to understand the intricacies of the index composition.
On a typical day, the small investor who trots to the bourse, just looks up at the screen and exclaims: " Oh, my God, 160 points up (or down)" and goes about buying or selling, depending on the direction of the Index.
But keeping the index story aside, no one disputes the fact that the Karachi stock market has grown rapidly in the three years since 2001. Everything appears to have gone right.
Political stability, a miraculous 6 per cent plus growth in the economy, healthy corporate earnings that provided investors competitively highest return compared with other investment avenues, such as NSS and bank deposits and capital and stock market reforms, have done much to rebuild investor confidence.
The market and the number of investors who now dabble in shares, received further boost by the fabulous profits that investors reaped from Government's privatisation of 5 to 10 per cent equity in its mega units such as OGDC and Pakistan Petroleum Limited (PPL) through the stock exchanges.
The market price of stocks has multiplied over the past three booming years, but is there still an upside potential? Most market analysts answer that question in the affirmative.
The Pakistani stocks which were trading on a price-to-earnings (p/e) multiple of 5 times their earnings have now escalated to 11 times the financial year 2004 earnings. But baring Japan, stocks in most of the Asian markets trade on average of 14 to 14.5 times, which makes the Pakistan stocks still attractive.
And money keeps flowing in through higher remittances and local investments, including those in increasing number of mutual funds. Most prudent people in the share business, nonetheless, suggest caution.
During the last big boom of early nineties, stocks had scaled to 25 times the earnings. But when they came crashing down, the market saw many people standing outside the market gate, a begging bowl in hand, who only a few days ago were millionairs.
Such eventuality is not likely to take place this time around because of the controlled fall of prices effected by the stock exchange through 'circuit breakers'. Also unlike the previous big bang rally, this one is based a little bit more on fundamentals.
Even so, prices of some of the stocks have climbed unjustifiably high. Small investors who may follow the herd and put their savings in overvalued shares are likely to burn their fingers.
Speculation is also running high, which is apparent from the escalating investment in the Carryover 'badla' market. The 'badla' rate is at the maximum allowable ceiling of 18 per cent for the past two months.
'Badla' investment is at worryingly dizzy sum of Rs 37 billion. Add to that around Rs 30 billion open positions in the future market and the week holdings come to over Rs 60 billion, equivalent to US dollar one billion. If one-fifth of that is genuine long term investment, 80 per cent could be considered as purely speculative.