Murder, floods and discount rate cause KSE-100 to sink

KARACHI: The stock market had a lot to deal with this week. Activity in the Karachi Stock Exchange (KSE) decreased following of the murder of a provincial legislator on Monday which triggered a spree of target killings that lasted for four days. Volumes saw a decline of 22 per cent compared with last week.

Add to this a stock market reeling from the increase in discount rate, devastating flash floods and the realisation that the reintroduction of leverage products is increasingly unlikely and you have a recipe for a volatile market.

Thankfully though, the devastating flash floods which have been making the headlines did not affect sentiments at the KSE in a major way. Moreover, foreign portfolio investment of $15 million provided support to the market and helped keep the weekly decline in check.

Even corporate earnings season was also unable to do much for the stock market; the corporate earnings announcements of publicly listed companies like MCB Bank, Pakistan Petroleum and Pakistan State Oil did little to attract investor interest in the market, according to JS Global Capital analysts.

State Bank surprise

The State Bank increased the discount rate, the interest rate which it charges depository institutions, by 0.5 to 13 per cent. The decision was surprising and contrary to expectations of the market participants. The highly leveraged sectors such as textile and cement responded negatively to this decision as their market capitalisation fell by 2.5 per cent and 3.9 per cent, respectively. The authorities justified their stance by highlighting fiscal imbalances as the weak link in the current economic setup. The decision of upward revision in policy rate would hamper the recent positive trend in the local bourses and can see a short-term pressure on stock prices, particularly for highly leveraged companies such as cement, fertiliser and textile companies, according to analysts at BMA Capital. On fixed income side, the unexpected increase in policy rate should put an upward pressure on yields and also broaden the bid offer gap for all tenors. They, however, pointed out that such a significant knee-jerk decline in stock prices should be taken as an opportunity to buy up stocks with robust cash flows and limited leverage.

Disappointing corporate results

In addition, results for PSO, MCB Bank and Habib Bank remained below market expectations; depressing market sentiments further. Stock prices reacted to expectations surrounding the corporate results. PSO and PPL’s results created significant ripples on Friday, where announcement of a 20 per cent stock dividend in PPL garnered a positive response from the market. While PSO’s earnings disappointed the market as expectations had adjusted sharply upwards in the run up to the results.  All the results were slightly below market consensus which created a downward pressure in the market.

Additionally, clarity on margin trading did not emerge during the week which could have acted as a major trigger for the market. However, positive developments on the same front would be taken as key trigger for the market. Investors had been anticipating the reintroduction of leverage products; as it was rumoured that they would be making a comeback, however it seems more and more unlikely as the rumoured mid-August date approaches.

Published in The Express Tribune, August 8^th, 2010.