With the Karachi Stock Exchange (KSE)-100 Index hovering around the unprecedented level of 16,250 points, small investors are becoming increasingly wary of the possibility of a sudden stock market crash. Is history going to repeat itself with a selling spree crashing the bourse in a replay of the 2008 crisis?
Elixir Securities CEO Junaid Iqbal, whose brokerage house has an estimated market share of around 3% in the KSE daily turnover, believes that a stock market crash is unlikely – usual ups and downs notwithstanding. “There is no reason to believe that the market will crash just because it did so in 2008,” Iqbal told The Express Tribune in an interview.
Stating the major reasons behind his optimism regarding the long-term stability of the KSE, he said it was now operating at a multiple of 6.7 compared to the multiple of 12 back in 2008. Used in the context of share price-to-earnings ratio, the term ‘multiple’ reflects how much investors are willing to pay per rupee of earnings. A multiple of 6.7 means that investors are willing to pay a multiple of 6.7 times the current earnings per share for all KSE-100 Index stocks.
Compared with the multiples of 10.8, 14.9 and 15.6 for the Hang Seng Index, Bombay Stock Exchange SENSEX and Jakarta Composite Index, respectively, the KSE-100 Index is still very cheap, Iqbal said.
Another reason for the unlikelihood of a market collapse, Iqbal says, is the elimination of badla from the KSE. A trade based on badla means the purchase of a stock with borrowed money, with the stock exchange playing the role of an intermediary, at an interest rate determined by the overall demand for the underlying stock.
“There is no pump-and-dump anymore, which means the market is far more stable compared to the market of four years ago,” Iqbal explains.
The third reason that is likely to prevent a sudden and drastic drop in share prices is the exclusion of the benami practice in stock trading: a form of trading in which shares are transferred to one person for a consideration paid or provided by another person. It is now banned and the market operates on cash-based transactions alone.
“It is not a manipulated market, and the rise in the KSE-100 Index is based on sound fundamentals. So there’s little reason to believe that a crash is imminent,” he said.
According to an estimate, a little over 300,000 people out of a population of 180 million maintain a trading account with the Central Depository Company. Out of those 300,000 investors, just about 37,000 could be categorised as active traders, because they paid capital gains tax last year.
Similarly, the share of market capitalisation in Pakistan’s GDP in 2011 was 15.5%, according to the World Bank. In contrast, the corresponding figures for India, Sri Lanka and China were 54.9%, 32.8% and 46.3%, respectively.
“The number of active investors in Pakistan is abysmally low. We must increase it to make our stock market more viable,” he said.
Iqbal said less than a dozen brokerage houses in Pakistan were actively trying to increase their client base by holding awareness programmes and educating the public at large about the benefits the stock market offered compared to other investment options.
For example, if somebody bought shares worth Rs1,000 in Fauji Fertilizer Company on June 30, 2002, it would have worth Rs36,473 today, suggesting a compound annual growth rate of 43.3% over a period of 10 years, he noted.
Similarly, an investment of Rs1,000 in Muslim Commercial Bank and Bank Al Habib in 2002 would now have been equal to Rs32,952 and Rs21,670, respectively, Iqbal added.
“About a quarter of Elixir Securities’ revenues come from retail business,” he said, while referring to individual traders, as opposed to institutional investors, who operate through his brokerage house. “In order to increase our retail business, we hold investor education sessions regularly,” he said.
Published in The Express Tribune, November 29th, 2012.