Market meandering


-Editorial

WEB DESK: Pakistan is trying its best to get an affirmative vote from the Global Fund Managers for upgrading Pakistan Stock Market to the status of an ‘Emerging Market’ from its present categorisation as a ‘frontier market’. Pakistan’s case will come up for consideration in the Annual Review scheduled for June 14, 2016.

The upgradation to MSCI Emerging Market status from the existing MSCI Frontier Market would hopefully attract bigger sums from the Global Fund Managers than at present. Karachi Stock Exchange (KSE) used to enjoy the status of an Emerging Market until it decided to close shop from August 2008 to November 2008, ie, after brokers who were overleveraged voted to place a floor for an indefinite period, as margin calls were coming in and 36.8 billion dollars was wiped out since April of that year.

Putting a floor meant a virtual closure of market. This was a mistake of gigantic proportions that was committed in response to a petition signed by 104 out of 108 brokerage firms asking the Board of Directors of defunct Karachi Stock Exchange to create a breather in a falling market. The BoD of KSE met under the chairmanship of a SECP-nominated chairman and since one of the nominated directors was absent and the broker-Directors were in majority, they voted with their feet and not their head.

The apex regulator, ie, SECP, was not in favour of doing so. But later the Pakistan People’s Party government (which was then in office) intervened and the closure prolonged. Faced with falling foreign currency reserves, the government went rushing to the International Monetary Fund (IMF) to have a Stand-By Arrangement in place before the market was allowed to be functional again.

Forex reserves of State Bank of Pakistan had fallen to just over two (2) billion dollars. Portfolio investment was between 300 and 500 million dollars. Thus the officialdom was of the opinion it had to first save the country and not the capital market. Global Fund Managers have not forgotten this abhorrent behaviour of ours. SBP was not willing to help also. First, a syndicated loan to National Investment Trust was arranged (Rs 14 billion) against a government guarantee from banks and only then floor was removed which meant capital market was reopened. Market Index was around 10,000 in August 2007.

When the KSE trading reopened, the Index had declined to 5000. Brokers had learnt a lesson of a life time. Instead of taking stop-loss they were out of pocket on their own portfolio. ‘Badla’ borrowers also suffered. There was nothing wrong with ‘Badla’; it was a financial instrument which the local players/investors understood.

What was wrong was the methodology of ‘Badla’. Once the deal was done then financing was arranged which was different from margin financing and investors lost their margins when the value of scrips they had bought dropped and they could not pay up. Instead of ‘Badla’ investors, the Mutual Fund Industry is a dominant player and so are the banks. Now retail investors, by and large, invest with their own savings. The regulatory framework has been strengthened by SECP.

The apex regulator and the government of the day now has a better understanding of market dynamics than before. Leverage in the market is non-existent. There is a Chinese wall between investors and their brokers. It is a demutualized exchange with brokers having less say than before. Also the forex reserves of the country are in a comfortable position. Interest rates are at a record low, returns on scrips are quite good, and the market is expected to rise further.

And, Pakistan shall never, repeat never, make the mistake of capital market closure again. Let us show the world we mean it when we say never again.-Business Recorder

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