KSE-100 hammered by chairman’s statement

Chairman’s statement has signalled that the product might not be introduced on time.

KARACHI: The stock market received a hammering this week after the chairman of the Karachi Stock Exchange, Zubyr Soomro, expressed his dissatisfaction with the proposed margin financing product in a letter of dissent made public over the previous weekend.

The benchmark KSE-100 index declined sharply by 4.8 per cent (492 points) during the week, after declining 2.8 per cent on Monday alone. The bad news regarding the product was compounded by disappointing results, as well as the devastation caused by the floods in the country.

The product, which had been already approved by the KSE board of directors and finalised by the Securities and Exchange Commission of Pakistan (SECP), had been widely expected to be introduced in the country’s bourses by mid-August.

The chairman’s statement along with objections raised from the Mutual Funds Association of Pakistan have signalled that the product might not be introduced on time and have led to investor apprehension which triggered the sell-off.

The ongoing corporate earnings season also did little to improve the situation as several heavyweights disappointed the market with their results and failed to help the market recover from Monday’s losses.

Foremost among them was the result of the Oil and Gas Development Company which disappointed with its lower-than-expected payout of Rs1.5 per share. Lucky Cement also disappointed investors with weak earnings despite a healthy payout of Rs4 per share.

The only exception was the announcement of the Hub Power Company which posted strong earnings growth of 40 per cent and an above-expectation dividend payout of Rs2.5 per share. The share remained in the limelight throughout the week and closed 6 per cent higher at Rs37.01 on Friday.

The flood situation also affected market sentiments mostly due to the inflationary pressures that can be expected from the widespread destruction of food crops due to the flooding. The monthly Consumer Price Index rose by 12.34 per cent in July after increases in electricity and gas tariffs.

With the destruction of food crops, it is likely that prices of food items will go up, especially during the month of Ramazan and hence will lead to higher inflation. Unrelenting inflation could signal the State Bank will continue with its monetary tightening policy after the discount rate hike in July.

Average daily volumes declined by 5.2 per cent during the week and stood at 59 million shares, reflecting investor apprehension as well as the reduced trading during the shorter trading hours in Ramazan. Average daily value also declined by 25 per cent as the majority of trading was restricted to lower-priced shares during the week.

Total market capitalisation of the KSE dropped by 4.7 per cent to Rs2.76 trillion by the end of the week. While foreigners were net buyers of $13.1 million worth of shares, local mutual funds sold $13 million worth of stocks during the week.

What to expect?

With the majority of corporate results behind us, the market’s direction is likely to be led by the amount of foreign interest in the country’s bourses. Macro-economic data will also continue to play a major role as data on inflation and budgetary and trade deficits will be monitored by investors.

Lastly, and most importantly, news regarding the introduction of the margin financing product will determine the direction of the market in the short run. An announcement of a delay can trigger a further sell-off while an early introduction is likely to return the market to pre-decline levels.

Published in The Express Tribune, August 15^th, 2010.