The Karachi stock market is not a casino, Pakistan - stop gambling!

Behavioural inefficiencies should be managed and investors should perceive themselves as investors instead of gamblers

Arslaan Asif Soomro April 01, 2015
“Becho, becho”

(Sell, sell)

“Lay maal” 

(Take the stock)

“Karachi stock market mein shadeed mandee (decline)”

“Shares key karobaar mein hazaar point ki kami”

 (A 1,000 point drop in shares)

Such are the headlines across the media nowadays which happens to be the topic of discussion among many. Meanwhile, the broader Index, KSE 100, declined by an eye-popping 17.5% from 35,055 points to 28,927 points in less than two months. For many, this is another bad experience, but for some, it has turned out to be an exciting opportunity.

Like any doctor who sees a sick patient, we must first assess the rational reasons behind the steep fall. Sometimes, the doctor correctly identifies a temporary viral attack and gives a combination of ‘comfort plus painkillers’ to the patient. In other cases, more serious actions are required. Similarly, with the stock market, we should begin by evaluating the reasons of the fall as judiciously and prudently as possible:

Foreign selling

The foreign shareholders had a net selling of $96 million during the period of decline. Many attribute the amount to have stemmed from the following reasons:

1. Everest Capital’s decision to close their funds after defaulting on a global currency trade.

2. The stock market shooting up relentlessly after hitting lows at the time of the Pakistan Tehreek-e-Insaf (PTI) versus Nawaz Sharif fiasco in late August 2014 and thus, foreigners wanted to capitalise on their gains.

3. The withdrawal of exemption on withholding tax on capital gain for foreigners which may dilute their returns and/or reveal their identity (unwillingly) to the tax payer.

Local funds selling

As the market started inching upwards non-stop, from September 2014 to February 2015, many of the retails felt ‘left-out’ and wanted to participate in the rising market. To their (dis)comfort, a few of the products launched by the Asset Management Companies (AMC) entailed a claimed principal protection. In simple words, they assured money will not be lost, but gains from the stock market’s ‘rise’ will be offered.

The underlying methodology usually adopted is called ‘Constant Proportion Portfolio Insurance (CPPI)’, which essentially buys stocks when they are going up and sells when the stocks are going down. Connecting the trick with foreign selling, these funds might have compounded the selling in a falling market as their principal protection cushion erodes and funds sell in panic, mechanically to safeguard the capital.

Margin calls

Individual investors usually take leveraged exposure in the market. They may invest Rs200 (Rs100 equity + Rs100 debt) and if the portfolio declines by 15%, the equity declines by 30%. Such magnifying losses create panic and invite ‘margin calls’ from the brokers which ask them to deposit more money to maintain the exposure or liquidate with losses.

Hence, in a rapidly falling market, some weak holders are filtered out and the exchange of hands takes place to further augment the structural strength of the market.

But the above factors do not signal that the party is over and it’s time to pack up. Disinvesting is a decision that is far more difficult than investing and before any exit, the investors must assess the following:

Is the decline a permanent or temporary feature?

As we said earlier, it was a temporary decline led by a “collision of sellers”.

Am I finding better investment alternatives?

Banks and National Savings Certificates offer even lower single digit returns net of taxes. Gold is likely to further remain in the bearish trend while real estate requires a handsome chunk of capital outflow with ensuing legal and tenancy issues.

Has the economy improved overall lately?

Inflation level has bottomeddiscount rate is historically low, Foreign Exchange (FX) reserves are reaching an all-time high, the costs of electricity and oil have come down drastically, the political and law and order situation has improved considerably, the currency is stable, gas is being injected into the system, remittances are at an all-time high and after a very long time, our credit rating outlook was assigned a “positive” note by Moody’s.

In the last five to six years, the economy has never been on a stronger platform as it is now. In such circumstances, the risk appetite should increase and one should invest in established and/or new businesses.

Has the index reached the maturity valuations?

Pakistan is well poised to stage a remarkable turnaround if the low oil prices and its trickle down benefits are aptly utilised. The index is still considerably cheap and offers higher returns than many other regional players. Moreover, the country has come further into the limelight as one of the few frontier markets which have enormous growth potential, as mentioned by Morgan Stanley’s chief investment strategist,
“Pakistan’s rise is just a matter of time.”

Unfortunately, the retails who join the party late, at the peak, expect the jubilation to continue at the same pace. And when it does not, as it usually does not, they shout, cry, cut losses, leave the table and re-join the party at higher levels when they see someone else (who invested at lower levels) making money.

Such behavioural inefficiencies should be managed and investors should perceive themselves as investors instead of gamblers. If a bystander witnesses heavy unexpected showers, he raises his elbow and walks briskly to refuge until the dust settles.

If a person can adapt to ‘withstanding’ the turbulent weather, the investors should also ‘withstand the ‘volatility’ and stay put.
Arslaan Asif Soomro The author has a degree in Investment Management from Cass Business School, London and has also obtained CFA and FRM qualifications. He is currently working as a Managing Director at KASB Securities and has a keen interest in economics, capital markets and social impact investment. He tweets at @AAHSoomro (
The views expressed by the writer and the reader comments do not necassarily reflect the views and policies of the Express Tribune.


Saad | 8 years ago | Reply Well articulated write up ! I am fundamentalist, I reckon there is battle of fundamentalist and technical mindset, I have seen many fund managers take technical perspective and created panic - Why should we blame Retail investors ? I would also like enlighten the role of Sales representative of Brokerage houses they trap uninformed investors, sometimes their tricks work out and sometimes it goes other way. I would like to sum up your article with one word is the "Herd Mentality" of our retail investors who tries to book gains on rising stocks persistently. As a professional, I would like to ask you one question, "Do you believe these inflation numbers are real, don't they have structural weaknesses in the statics ? the reporting structure of PBS ? Please do enlighten AAH.
AAH | 8 years ago The retail investors are not usually "blamed" but are rather part of the exuberance. And by retail investors, my reference was pointing towards the High Net Worth punters who have muscles and power to drive the market - though it is declining owing to institutionalisation of the market investors. The smaller investors are naive and connived by their brokers who offer them higher leverage solely to multiply their commissions. These small retailers are "driven" by brokers and do not seek services of professional asset managements. Though I do not have entire faith in the numbers being published by PBS as there is no clarity on the sample being used, nor is there a structural link between the retailers to electronically assemble the variation in the prices and neither is it a 100% reflection of a common man's basket expenses. Plus the rents they used to calculate expenses are part of some -god-forbidden-secrets that we never know which "basti" they are using for their reference point. Moreover, you would agree that the weightages of expenses drastically vary from a family to family. For instance, for someone earning 20,000 a month, 20% goes to rent, 20% goes to transport, 15% goes to "kunda, 35% goes to food etc. HOWEVER, broadly, these CPI numbers do make sense and are also in concurrence; oil is down drastically, electricity prices have come down, gas prices are going up (not for lifeline users used in cpi basket), and globally agricultural products are in downturn because of excess supply while metals are in bearish trend owing to slack in demand. Hence, the general trend in CPI should be a material negative trend YoY only. So yeah, I would bet met money on the numbers!
Pakiatani | 8 years ago | Reply Haters will be Haters
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