Market drops another 2.7 per cent

Investor sentiments hit rock bottom on possibility that the margin financing product might be delayed indefinitely.

KARACHI: The market continued where it left off two weeks ago and shed 2.7 per cent of its value as investor sentiments hit rock bottom on the possibility that the margin financing product might be delayed indefinitely due to infighting in the KSE Board of Directors.

Investors had expected the product, which is similar to the badla system (discontinued after 2008’s market crash), to be introduced in the country’s stock markets by the middle of August.

The Securities and Exchange Commission of Pakistan (SECP) finally gave the go-ahead to the product in July, after the KSE Board (along with its chairman) took months to prepare, finalise and sign the draft paper of the product.

Then suddenly in the first week of August, the chairman of the board, Zubyr Soomro, sent a note of dissent to the members of the exchange, expressing his dissatisfaction with the final product. The SECP, as a result, requested the board to address the chairman’s issues and get the product reapproved by the directors.

The chairman’s dissent created ripples in the stock market and the benchmark KSE-100 index has shed almost 10 per cent of its value since the note was issued. The rest of the KSE Board is now at loggerheads with the chairman and has even suggested a no-confidence motion against him for his unilateral action.

The board cancelled its scheduled meeting on August 26 in which the chairman’s concerns were to be discussed and investors were left reeling at the prospect of the margin product being cancelled altogether as a result of this internal strife.

To add to the market’s woes, the devastation of the flood and its toll on the economy is becoming clearer. New estimates have suggested that the GDP target will now be reduced by 2 per cent to 2.5 per cent for fiscal year 2011. The market started the week on a negative note and the first three sessions of the week resulted in an overall decline of almost 3 per cent, before finally easing off in the last two sessions to close down by 2.7 per cent (262 points).

Volumes continued to drop further as they declined 18 per cent from the previous week because investors chose to remain sidelined in light of the negative news. Activity was witnessed in stocks which announced results or were subject to foreign buying.

Lotte Pakistan and ICI Pakistan announced better-than-expected results and climbed as a result. Meanwhile, Fauji Fertiliser Bin Qasim and several banks announced below-expectation results which led to their decline.

In positive news, foreign aid continued to flow into the country along with the International Monetary Fund taking a lenient line on the country due to the flood crisis. The IMF agreed to disburse a tranche of $1.3 billion and has supposedly also agreed to relax restrictions on meeting several fiscal targets, to continue the support programme.

Total market capitalisation fell by 2.7 per cent to Rs2.68 trillion by the end of the week. Foreign buying remained stable at $6.1 million, but mutual funds were net sellers of $9.3 million worth of equity.

What to expect?

As the situation on the margin product remains ina  shambles and the earnings season coming to a close, investors are likely to take a view on macro-economic developments such as foreign inflows and the IMF’s support.

The market’s decline has left many stocks at attractive valuations and a short-term recovery can be fundamentally expected. Yet, any development on the margin product issue will still likely remain the most important trigger in the short-run.

Published in The Express Tribune, August 29^th,