Fluctuations on McLeod Road

Investors in the Karachi Stock Exchange (KSE) are no strangers to volatility, but the last two weeks have been a roller coaster ride, even by the KSE’s own mercurial standards. In an equity market as small and illiquid as Pakistan’s, sharp gyrations of prices are not uncommon, but most seasoned market observers believe that the movements seen over the last few days at the Karachi Bourse cannot be explained away using market forces alone.

The trouble appears to have started with Miami-based hedge fund Everest Capital, which has several different hedge funds that have recently run into trouble for reasons that have nothing to do with the Pakistani market. However, in its attempt to liquidate its holdings rapidly, Everest appears to have caused a sudden decrease in prices of many stocks, causing the index to fall which, in turn, caused a further sell-off as investors panicked. Yet the $70 million that Everest liquidated from the Pakistani market, while substantial, is not sufficient to justify the kind of massive drop we have seen in recent weeks. Indeed, most savvy observers of the market suggest that at least part of the problem originates in the decision of the Securities and Exchanges Commission of Pakistan (SECP) initiating stern action against some of the largest institutional investment firms in the country.

There are two possibilities here. One is that the firms have been shaken into quickly trying to end their illicit practices, which in turn has caused a temporary sell-off of some stocks. This had the misfortune of coinciding with Everest’s troubles. If that is the case, then we can expect the market to correct itself, as indeed, it appears to have partially done by March 31. But a more disturbing possibility is that some unscrupulous institutions are offloading shares as a means of threatening the regulator with their market power. If this latter scenario is the case, then we believe the SECP should not be afraid to take the sternest of actions. The long-term development of Pakistan’s capital markets can withstand a short-term crisis, so long as the regulator is able to restore investors’ faith in a free and fair market.

Published in The Express Tribune, April 2^nd, 2015.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.