KARACHI, Sept 13 Simon Cox of the Emerging Markets Stock Invest Fund (Hong Kong) was visibly aghast with the Aug 27 decision of the Karachi Stock Exchange when it put a floor under the KSE-100 index level of 9,144 points, to prevent it from going deeper down the drain.

“It is violation of basic principles of free market mechanism to block the exit,” says he. “I have gone through the record of stock exchanges. In a comic-tragic manner he said that never since the oldest stock exchange in the world at Amsterdam was established in 1602, he could locate one example where a stock exchange had ever capped the downside for such a long time.

”In that respect, the KSE is turning over a new leaf in stock investment books,” says Simon.

But the KSE has advanced reasons for its doing, with which local participants agree in varying degrees. The watchdog, Securities and Exchange Commission of Pakistan (SECP) has visibly distanced itself from the entire process.

Locating Mr Razi-ur-Rehman on his cellphone in Dubai on Saturday, Dawn enquired if that was the case. But the apex regulator denied his lack of knowledge, saying that he was in constant touch with the KSE.

He said that the KSE wanted a short 'cooling' period for the panic prone market to settle down. The KSE board in its last meeting on Tuesday endorsed the members' decision to review the 'flooring mechanism' on Sept 25. Would that be stretching it too far? Mr Razi says “We will hold talks with the KSE on Tuesday (Sept 16) to know their point of view”.

Meanwhile, it is learnt that the senior stock brokers have formed a “committee”, which is putting heads together to find ways and means to steer the stock market clear of the rocks. “One strong suggestion being deliberated is to inject liquidity in the market by setting up a private equity investment fund”, said a broker in the knowledge of things.

KSE Managing Director Adnan Afridi did not admit or deny that feverish discussions were going on to form such a fund. “KSE is not involved in such discussions, if they were taking place on the brokers' level,” he said.

A market participant said that hopes that the Equity Market Opportunity Fund (EMOF) of Rs20 billion set up under the management of NIT would come to the rescue, had almost died down.

The EMOF managers had inarguable reason “We are primarily responsible to the market and our contributors and would invest as the 'Opportunity' presents itself”. As a result of such investment, the benefit of stability could travel down to the market, a source close to the fund said.

But the question on most minds is whether it was correct, even at the cost of consternation of foreign investors, (such as Simon Cox), to freeze the market at a certain level above 9,000 points?

Nadeem Naqvi who recently stepped down as the CEO of AKD Securities and is in the process of establishing, brokerage “International Investment Company Limited, said that looking at the ferocity of the bear (KSE losing 44 per cent or 6,000 points in four months from index high of 15,760 points on April 20), there were only two options before the market managers to choose from Either to close down the market or to let it crash.

He said that there was a true danger of the collapse of entire financial system as a result of domino effect from the margin calls and forced sales to prevent bank defaults. He said that the Pakistani equities were now trading at attractive price-to-earnings multiple of 5.9 times the forward earnings.

The market is starved of liquidity. Cash-rich companies are beginning to avail the recent laxity in rules of buy-back of shares, called 'treasury stocks'. Siddiqsons Tinplates — a less liquid company — announced on Saturday that it would consider repurchase of its own shares; NBP having made a similar decision was looking for a financial adviser for the deal and the board of directors of OGDC — the scrip with heavy weightage of 16 per cent in the KSE-100 index, had earlier conveyed a decision to that effect, but latter said that a financial adviser was being sought.

Some thought the giant oil exploration company could be cherishing second thoughts on calling back the stock at this time. But Samiullah Tariq, head of research at InvestCap observed that by reducing the free-float through buy-backs, the bourse was defeating its long-term objective of keeping curbs on manipulation and cornering of scrips, to obtain short-term benefit of liquidity.

So what now? Mr Shahzad Akhtar, director at First National Equities was looking to the government to provide incentives. He said that incidents such as steep drop in price of crude from $147 to below $100 and the saturation in the Dubai property market could lure back investors to the Pakistani equities.

“What is required is to create confidence in the minds of investors,” he said.

Nadeem Naqvi said that it was possible to raise liquidity by the government by forming a consortium of selected institutions, which could be given Rs20 billion loan, borrowed from banks at discounted rate for one year period and invest the funds in blue chip stocks.

Given that stocks such as Fauji; OGDC; Hubco and others were giving out dividend yield of 8 to 12 per cent; the investors in the fund would make gains. When the price of stocks rises, those investors would make further windfall of 15-20 per cent in capital gains.