The delay in the introduction of the margin trading system (MTS), fears of an increase in the discount rate due to persistent inflation and political wrangling between the government and the judiciary were the main reasons behind the market’s decline.
Although the Securities and Exchange Commission of Pakistan (SECP) has accepted the draft concept paper of the MTS, it has added ‘risk-mitigating clauses’ which need to be incorporated before the system’s introduction.
Lack of clarity on what exactly these clauses are and no news flows pertaining to the MTS during the week made investors sceptical about when the system will finally be introduced in the country’s stock markets.
The State Bank of Pakistan (SBP) in its previous monetary policy announcement had increased the discount rate by 50 basis points (bps) to 13 per cent in an effort to contain the persistent inflation. Now, in the aftermath of the disastrous floods across the country, inflation is again expected to spike as a result of increased food prices due to damage to crops and loss of livestock.
As a result, another 50bps increase in the discount rate cannot be over-ruled in the SBP monetary policy announcement on September 29. Investors have chosen to remain cautious due to this development, especially after the 3-month treasury bill auction saw an increase in yield of 14bps. To make matters worse, political uncertainty in the country reared its ugly head again with talks about possible mid-term elections and a regime change.
The fragile state of the current political set up has done little to create investor confidence, especially foreign ones who according to JS Research now hold almost one-third of the KSE’s market capitalisation.
Furthermore, the tussle between the government and judiciary resumed with the law ministry failing to comply with the judiciary’s directives regarding the Swiss cases against President Asif Ali Zardari as well as cases being re-opened pertaining to the National Reconciliation Ordinance (NRO).
The negativity culminated with average volumes dropping sharply by 35 per cent to 58.5 million shares after almost-doubling to 89 million shares in the previous week. Total market capitalisation fell by 1.8 per cent to Rs2.74 trillion by the end of the week. Foreign buying declined slightly to $5.1 million while local companies were net sellers of $8.1 million worth of equity.
What to expect?
The market currently has an uncertain future as a result of the above mentioned issues, the effects of which will play out over the coming weeks. The discount rate announcement will be the most important short-run trigger as a status quo can lead to a relief rally, according to analysts at KASB Research.
The resolution and introduction of the MTS will be crucial for the market’s medium-term health. There is a crucial need to inject liquidity into the bourses and the MTS seems to be the only cure for the time being.
Published in The Express Tribune, September 26th, 2010.
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