Thursday, December 18, 2008

Karachi Stocks Keep Falling

Monday's removal of an arbitrary floor of 9144 points on KSE-100 imposed Aug 27 has sent Karachi shares plunging 16.21% in the first four days of trading, with KSE-100 closing at 7,785.26 points on Thursday.

The government and the exchange had hoped to be able to put together a 20 billion rupee ($255 million) stabilization fund to support prices once the floor was removed. However, some participating institutions balked at putting money into a falling market. Also, the International Monetary Fund, which recently agreed to advance Pakistan $7.6 billion to help stabilize its economy, is against using government funds to bolster share prices, reports the Wall Street Journal.

"Foreign portfolio investors who may have faced a liquidity crunch due to global events will offload their holdings in Pakistan," said Farhan Mahmood, a research analyst at JS Global Securities.

The trading volume at KSE has surged more than 50 times since Monday to over 50 million share a day. It had been less than a million shares a day on average since Aug 27, 2008.

The 49% drop in KSE-100 this year still compares favorably with Bombay's Sensex index fall of 55% so far in 2008. Since the KSE's movement of shares and the index is still restricted to a daily limit of 5% either way, it is likely to see further volatility in the remaining two weeks of this year, unless Pakistan's government is able to restore some confidence in the economy after the IMF bailout. If the KSE does continue its decline, however, it could create an opportunity for smart investors to pick up some good, healthy Pakistani blue chip companies' shares at deep discounts.


Saadia said...

The Karachi Stock Exchange is a big, fat devil's paradise, if you may. I took brief training in technical analysis last year, and started applying what I had learnt. It works on Forex because the market is so big, as for the KSE, it is small and highly manipulated. Had the big players wanted, this plunge could've been controlled (though probably not avoided); but they walked out of the market a long time back. Now, they'll ensure it goes down to the roundabouts of 4000 before they instigate the rally.

Riaz Haq said...

Though it is possible to manipulate markets with relatively low cap and thin trading volume, the current situation appears to be because of investors' fears about Pakistan's economy. KSE's drop is based on deterioration of economic fundamentals in Pakistan and the rest of the world. Add to that the massive loss of confidence under Zardari-Gilani government, and you have the potential for catastrophic drop. But it could also be an opportunity for bottom fishers to pick up some good, healthy companies' share at deep discounts.

Saadia said...

Of course. Macroeconomic factors have caused plunges in markets worldwide. That cannot be denied. But the KSE, in addition, is highly manipulated. The time is near for long-term investors to pick good stocks at highly discounted rates, but for traders, this market is 'high-risk-high-manipulation'.

Unknown said...

In BSE's case, the FII (Foreign investors) pulled money out and that caused the collapse. Who pulled the money out of KSE?

Riaz Haq said...

The Singapore-based Standard and Poor's ratings services on Friday raised Pakistan’’s long-term sovereign credit ratings by one notch; to ‘CCC+” for foreign currency while local currency rating has been retained at ‘CCC+’. According to standard poor’s, Pakistan’s long-term outlook could be further improved. The rating has been raised after the country received first tranche of loan from the International Monetary Fund (IMF).

In May this year, Pakistan's sovereign debt rating was lowered to B2 from B1, one level below Turkmenistan and Jamaica. The ranking on locally-issued debt was also reduced to B2. With further rating cuts, Pakistan ended up with junk ratings of CCC, far below the investment grade rating of B1 in 2007 under Musharraf-Aziz administration.

Riaz Haq said...

Those who invested in KSE are still ahead of those who invested in NY, London, Mumbai or Shanghai. KSE increased 10-fold 2001-2007. Even after 50% drop in KSE in 2008, investors have made 500% gain since 2001.

Riaz Haq said...

Here's a WSJ story about the exit of Citibank, Credit Suisse and JP Morgan from Karachi, Pakistan:

Three Wall Street banks have abandoned their brokerage operations in Pakistan amid the nation's bleak economic situation.

Citigroup's Citibank shuttered its equity research office in Karachi, the nation's financial capital, in March. Credit Suisse Group closed its research operations in the same city earlier this year. That follows JPMorgan Chase's decision in late 2008 to suspend its brokerage operations, also in Karachi.

A spokeswoman for Credit Suisse said the bank had closed its research division but was covering Pakistan companies from Singapore. A spokeswoman for Citibank declined to comment. JPMorgan retains a seat on the exchange but is not active in the country, a spokesman said.

The closures are a further blow to Pakistan's financial community at a time when the country's own finances are struggling. The country was forced to call in the International Monetary Fund in November 2008 due to a balance of payments crisis sparked by a rising oil import bill. The IMF has earmarked $11.3 billion for Pakistan, which has pledged to slash its government deficit and get inflation under control.

Wall Street banks began to dip their toes in to Pakistan's equity market in late 2006 after the economy had grown by an average of 7% for a number of years, fueled by liberalization of the banking sector and a consumer spending boom.

In late 2006, Pakistan's state-owned Oil and Gas Development Co. Ltd. raised over $800 million through a listing in London of 10% of its shares – the largest initial public offering of a Pakistan company in over a decade. Foreign investors poured $2.3 billion in to the Karachi Stock Exchange in the fiscal year ended June 2007, more than six times higher than the previous year, according to central bank statistics.

But Pakistan's economy began to unravel in 2008 causing runaway inflation and a growing current account deficit. The country, which is reliant on expensive imported oil, started to face regular electricity shortages which further clouded the economic picture. The resignation of former President Pervez Musharraf in August 2008 further spooked investors.

Billions of dollars were wiped off stocks in 2008 as foreigners headed for the exits. The stock market regulator imposed trading curbs between August and December 2008 to attempt to halt the slide but the measures had little effect. In the year ended June 30, 2009, foreign investors pulled out $511 million from Pakistan's stock market.

Average daily trading values on the Karachi stock exchange are currently less than $120 million, down from $400 million in 2007, says Asif Ali, Karachi-based head of research at National Bank of Pakistan, a state-owned commercial bank.

But Mr. Ali points out that foreign investment flows have turned positive in recent months as the government under its IMF program has succeeded in getting the current account deficit under control. Some $200 million has flown in to Pakistan stocks since the start of 2010, a small positive sign, he said.