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ANALYSIS : Bourses see-saw is over: more moderate ups & downs forecast

ISLAMABAD The see-saw of Pakistani bourses seems to be over, and barring Iraq war only moderate fluctuations are forecast for the near future.

The bourses seem to be returning to their normal, pre-boom level. But, investors, including expat dollars that flowed into the capital market may have to remember, with a tinge of sadness, a fall of 532 points within a matter of days.

The banechmark Karachi Stock Exchange KSE-100 that rose to 2950 may not return to this all-time peak in the foreseeable future. The market is currently levelling out. KSE-100 was 2,476.96 on Feb. 4 and was down to 2,418.05 on Feb. 10. That was the case when the market closed for long Eid Al Adha holidays.The turnover also had slid from Feb. 4 volume of 223.46 million to a mere 82.123 million shares on Feb. 10, as no buying interest was seen even though the prices were declining. The overall market capitalisation was down Rs12.546 billion at Rs536.959 billion as bluechip Pakistan Telecom, Hubco electricity and Pakistan State Oil - the heavily capitalized scrips sharply declined. These and other attractive bluchip scrips have declined to profitable levels, but there is hardly any takers. What will be the story on Monday, Feb. 17 when the market reopens after the long Eid holidays. Analysts are not bullish.

Although stock brokers are citing the likely Iraq war and the India-Pakistan diplomatic tensions as the more immediate cause for the bourses decline, but one wonders whether it is all that true and that far-reaching? As analysis during the stock market boom of the last few weeks shows, the real, and perhaps, the only reason is a more simpler one: supply of good scrips is not keeping pace with the rising demand. The demand, over months, has constantly gone up because:

The commercial banks have piles of liquidity. The state-owned and other financial institutions are not finding enough high-profit or high-yield investment channels.

Dollar inflows of home remittance send by Pakistanis working in Gulf, Saudi Arabia, Middle east and North America are constantly growing following stiffer, US-dictated monitoring of international financial transactions.

The real estate, another popular field for domestic and expatriate investors, is experiencing a rise in prices.

Profit rates on government-operated National Savings Schemes (NSS) have been cut further by an average 2.0 per cent effective Jan. 1.

Commercial bank profit rates on savings deposits are down further to 3.5 to 4.0, and are still declining as a result of the easy money policy adopted by the State Bank of Pakistan (SBP), the central bank.

The SBP has slashed its benchmark discount rate to 7.5 per cent - a signal to commercial banks to cut their lending rates to business and industry in order to reduce the cost of production and operations, so that domestic prices are reduced and exports kept on a course to ensure that Pakistani goods are sold in larger volumes and on high unit prices in the global market place.

De-dollarisation of the economy is taking place because people are converting their domestically-held dollars into rupee as value of the greenback is depreciating against the rupee.

Reverse flight of capital is taking place because those holding forex deposits abroad fear that their money may be caught up in US-monitoring of financial transactions, and for the reason that rupee is gaining in value while dollar is depreciating.

While the demand for stock market shares has been constantly going up, especially since 9/11, there has been hardly any fresh supplies of scrips. Over the last three years just less than half a dozen companies have been floated or listed on the stock exchanges, compared to 210 companies listed on bourses in three years prior to that. New industries and companies are just not being launched and listed on the bourses and no new shares are floated or offered. It means too much investment money chasing too few shares - and that too old ones. It led to spiralling prices of old and bluechip shares, prices for which were already rising before the recent boom started - and busted.

The boom was largely funded by borrowed money on the basis of Carry Over Transactions (COT) - locally called 'badla'. Stock brokers arrange and borrow funds for investors to buy shares under this system. The cost of such borrowing during comparatively normal times moves around 10 to 12 per cent.

It shot up to nearly 50 per cent during the peak of the recent boom. It was the cause and the effect of the boom and the bust. It funneled speculation and kept pushing prices to an unrealistic level. The stock brokers, who now are, once again, being blamed for excessive

and unethical speculation.

While they were busy in self-congratulation, and giving investors, especially small investors, false hopes of making big buck, the high cost of COT financing reached a totally unsustainable level.

Then the lenders, in most cases stock brokers themselves, started recalling their funds from the borrowers. The borrowers, finding no way to repay the credit, started selling their recently bought high-priced shares in panic, to repay the loans. The panic selling pricked the balloon and the stock market came down crashing.

While the boom was being fed by high-cost borrowed funds, financial experts and analysts kept on warning that the bourses are treading an unrealistic path, and flying too high. But, no one seemed to be listening. Fuelled by false hopes floated by self-serving stock brokers, small investors were, supposedly, all set to make a big kill, and earn a quick big buck. Instead, they burnt their fingers, once again.

The reality, on the basis of which caution was being advised, was that there is no change in the fundamentals of the economy, nor new businesses were being launched, nor new shares listed or floated. The broker speculation fuelled boom and COT dealings, is nothing new in the history of Pakistani bourses. "It is not a new thing at the Karachi Stock Exchange. Almost 75 per cent of the previous crises were nothing but generated by these COT- providers - who first help grow the bubble and then pinch it with their cash calls," says Arshad Arif, an analysts with Khadim Ali Shah Bukhari Company.

One way out of such recurring troubles caused by COT- operators and stock brokers is to ban the 'badla' financing and shift to margin financing by banks and financial institutions. That, analysts feel, will bring an end to the wrongdoing of 'badla' operators and speculators.

What should be done to obviate such recurrence and save the interest of people, specially small investors, who suffered losses due to manipulation of the bourse by brokers and speculators? The stock market regulator, Security and Exchange Commission of Pakistan (SECP), first applauded itself for introducing transparency and good governance in bourses when the market was going up. When things started turning sour, SECP Chairman Khalid A. Miraza attributed it to normal ups and downs that he said was part of the stock business. But, the slide was by far too deep, and the mischief by 'badla' operators too obvious and grievous to be ignored. SECP then slapped some more regulations to stem the downside and improve the health of this ailing business.

SECP issued guidelines ostensibly to "strengthen the code of conduct" in the stock markets. The guidelines include:

Prohibiting brokers from recommending any fundamentally poor stock to its clients and investors. Giving assurances to their clients and investors regarding the stock price targets.

Conducting discretionary trading on behalf of the clients, unless directed by clients in writing.

The SECP guidelines, though late in the day, can introduce a measure of discipline, curb wild speculation and bring about normalcy in the bourses, if these are really acted upon. However, over the years, either such regulatory measures were missing, or their implementation tardy and ineffective.

The result was that small investors suffered all along. It happened this time, too.

"Small investors lost fortunes this time," according to one brokerage firm. Even now there is no guarantee that the investors will be fully protected and the brokers will adhere to the guidelines. "The speculative furry this time was nothing short of a criminal act," says Arshad Arif, because it changed the scenario from "riches to rags." Several others agree. They have called for a thorough probe into the 'badla' traders' mischief, greed and the whole range of their operations that fabricate a boom, and then bring about a bust.

But the brokers, speculators and analysts have to aware if investors, especially small investors, go on loosing money as a result of wrong advice and false hopes, all these investors and businesses will go out of business. Would they like it? Wouldn't they rather protect the interest of the investors, in order to ensure their own buck?