Thursday, January 1, 2009

Last four years’ gains wiped out on bourses

The calendar year 2008 eroded the last four years straight and unprecedented growth of local stock markets, as Pakistan’s leading benchmark KSE 100-share Index crashed by over 58 per cent to four years low of Dec 2004 level.

The KSE 100 plummeted 58.332 per cent or 8,210.82 points on year-on-year basis to 5,865.01 points on Wednesday from 14,075.83 points on Jan 01. Over the same period, an outflow of Rs2.471 trillion from market capitalisation was also noted.

Average daily volumes in the cash market fell 48 per cent in 2008 to 133 million shares. While foreign portfolio investors disinvested US$439 million in net during the year.

The year started at local bourses with confidence, cheer, and smooth flight to record high till April despite a lot of hue and cry on political front.

Banking, mutual funds, oil marketing companies, refineries, insurance, telecommunication, cement, fertilizer, automobile almost all of the economic sectors were performing on fast pace with every passing day.

But, the global economic recession - that was initiated with the mortgage sub-prime issue in the USA in middle of calendar year 2007 - surrounded equity markets across the globe where the local bourses were no exceptional.

The sub-prime mortgage issue started impacting local bourses from middle of April when Karachi Stock Exchange (KSE) proposed further extension in the exemption of Capital Gain Tax (CGT) on share transaction, which it was enjoying since 1973.

Government was seen firm to end CGT exemption on June 30, as it was viewing market as a strong and potential source of taxed income owing to its unmatched performance over the last seven years - Since year 2000.

The difference of opinion between government and brokers created a rift between the two and brokers - who were enjoying strong hold and monopoly - started pulling down the market to convince the government that CGT was not in market’s favour, experts recall.

Eventually, the market got another two years’ extension in CGT up to June 30, 2010, but by the time it got extension sometime in July market had incurred heavy losses.

In the meantime, the global recession had sped up its impact, and on local political front the PPP-PML(N) coalition government had presented a strong case against Gen. Musharraf who had to step down from President office in August.

This political rift between President and Prime Minister’s camps never allowed the local bourses to come out of depression till then. Yet it (market) was getting posited to stable, but the failure of coalition government to reinstate all deposed judges on Nov 03, 2007 position resulted in the break-up of coalition government.

This all lingered the political crisis amid continuous withdrawal of funds by overseas investors, and the revealing of a number of weaknesses in the local economy altogether shattered the equity investors’ confidence on the bourses.

Till this time, players had put all of their money on stake at bourses and market authorities had started making margin calls and mark-to-market losses, which many of them had failed to deliver.

On the other hand, State Bank of Pakistan had raised its discount rates from 10.5 per cent to 13 per cent during May to July and also drained out money from market by using some tolls to control the historical high inflation in Pakistan.

However, SBP inflation control policy proved fatal for equity markets, as tight monetary policy created liquidity crunch.

To run away from massive level default and bankruptcy of brokers, the Securities and Exchange Commission of Pakistan and authorities at local bourses made many regulatory changes. The last change was the introduction of floor-price mechanism in August that prevented incurring losses for about three and half months, but lifting of floor on Dec 15 resulted in fresh 36 per cent decline in market.

“Imposition of price floor by the regulators was the confidence killer for the market as it created one of the worst crisis in local markets. Karachi bourse that fell by 35 per cent before the imposition of floor, crashed by 36 per cent in 12 trading sessions after the lifting of floor rule,” reported JS Global.

The market experts are looking forward to consolidation of market in around the current level while ruling out any sudden upsurge in the index.