Post Reply 
 
Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
KSE index freeze: The loss of credibility
11-03-2008, 08:25 AM
Post: #1
KSE index freeze: The loss of credibility
By Tariq Choudhry

ON August 27, the Karachi Stock Exchange board decided to place a ‘floor’ mechanism to prevent the stock prices from falling below the closing prices of that day.

The reason cited for this, at that time, was to avert a collapse of the stock exchange clearing system and allow it a few days to ‘cool’ down.

It remains to be seen how many brokers or institutions will actually go belly up if and when the market re-opens to normal trading. But what is not realised is that putting curbs on the capital market will actually be counter-productive.

Pakistan has had about 4-5 years of high growth and witnessed massive foreign direct investment (FDI) and foreign portfolio investment (FPI). These inflows supported external accounts to a great extent and gave much needed cushion to the economy. However, over the past year or so, there has been a fall in both the FDI and the FPI which is mainly attributed to various reasons such as volatility in global equity and financial markets, deteriorating domestic politics and changing economic scenario.

As foreign money inflows started to slow, the currency, which was quite stable over the past few years, lost almost 25 per cent of its value versus the greenback since January. This entailed a reversal of funds flows, as large foreign funds started to divest their portfolio investments. With the rupee sliding, foreign funds decided to go for aggressive selling , putting further pressure on both foreign exchange reserves and the economy.

The stock market capitalisation has been eroded by about $40 billion in a short span of time. This has also resulted in wealth erosion across the board with brokers taking a big hit, as proprietary positions continued to build up, and clients defaulted on their obligations. The brokers felt that it was imperative to enforce a floor, otherwise, apart from some brokers, the stock market clearing house could default.

They argue that had the floor not been placed , the result would have been disastrous. However, no one can say for sure this would have actually happened. In fact, had the floor rule not been enforced, the market may have fallen initially but also found a reasonable bottom. Foreign funds may actually have come in to buy shares which offered value and growth. Confidence may have actually been better than it is today, as many brokerage houses do not have much to do.

Yes, it can be argued that had the stock market remained open, it would have caused more financial losses to brokers, banks and other financial institutions which have links with the capital market. It would have put further burden on the central banks reserves because of the outflows from the capital market by foreign funds. But, it can be argued that if we allow foreign funds to come into the country, we must also allow them an exit strategy.

Had the markets been open today one may have seen the markets fall but at the same time some of the longer-term funds looking for value may have come in to buy as well.

Another step taken by the SECP on the instructions of the Mutual Funds was to ban any further investment or redemptions. Local mutual funds had cited a rise in redemptions but owing to the floor mechanism, the same could not be honoured, which had put further pressure on the funds.

In normal circumstances, local mutual funds would have actually put money in falling stock prices, but sadly, curbs were put against redemptions and further investments which would be undone three days after the market reverts back to normal trading.

This decision has eroded market confidence, and the mutual fund sector, which is still at its infancy stage, has received a jolt and money will take time to flow back into this industry. These investors will go back to the government-sponsored scheme such as the National Savings Schemes.

The new advisor on finance Shaukat Tareen should undo these steps to bring back market confidence. He must also make sure such steps as market intervention, changing of rules overnight without any consultations with stakeholders, must be avoided in the future.

The only way to restore market confidence is to leave the market to its natural course and ensure that rules and regulations are strictly followed.

The writer, a stock broker, works for a private equity firm.

http://www.dawn.com/2008/11/03/ebr9.htm
Quote this message in a reply
Post Reply 


Possibly Related Threads...
Thread: Author Replies: Views: Last Post
  Land for road to Bahria Enclave: Official causes Rs5bn loss to CDA Salman 0 8,577 05-29-2013 11:45 AM
Last Post: Salman
  Development at a great loss Salman 0 3,465 07-16-2012 12:12 PM
Last Post: Salman
  Energy crisis causing irreparable loss to national economy: CM Salman 0 3,797 04-07-2012 12:15 PM
Last Post: Salman
  Call to freeze housing finance to single digit Lahore_Real_Estate 0 3,551 02-02-2011 02:56 PM
Last Post: Lahore_Real_Estate
  Prosperity Index & Pakistan! LRE 0 3,011 11-03-2010 10:46 AM
Last Post: LRE
  Poultry industry suffered Rs eight billion loss due to floods Lahore_Real_Estate 0 3,972 10-28-2010 03:16 PM
Last Post: Lahore_Real_Estate
  Non-completion of housing schemes: OPF suffers Rs 718.78 million loss Lahore_Real_Estate 0 3,375 10-11-2010 12:04 PM
Last Post: Lahore_Real_Estate
  Procurement of land near Lahore: NICL caused Rs 1.045 billion loss to exchequer: NAB Lahore_Real_Estate 0 3,866 08-30-2010 12:41 PM
Last Post: Lahore_Real_Estate
  ATT Affecting Pak Economy Badly; Causing Loss of Billions of Dollars LRE 0 4,059 07-13-2010 12:25 AM
Last Post: LRE
  EOBI Face Heavy Loss for investing in BOP LRE 0 4,641 06-02-2010 01:29 AM
Last Post: LRE
  Pak Suzuki reports loss of Rs17.61m Lahore_Real_Estate 0 3,417 04-28-2010 01:04 PM
Last Post: Lahore_Real_Estate
  Gwdar Port: Rs 120 Million Loss in 8 Months LRE 0 3,429 03-27-2010 11:33 PM
Last Post: LRE
  ICT unable to freeze Zardari's 2,460 kanals Lahore_Real_Estate 0 2,844 01-26-2010 01:18 PM
Last Post: Lahore_Real_Estate
  NAB Orders to Freeze Zardari's Assets in Islamabad Including 2460K Land in Sangjani LRE 0 3,822 01-22-2010 03:37 PM
Last Post: LRE
  No plan to freeze foreign accounts of the NRO beneficiaries LahoreEstate 0 3,297 11-22-2009 05:51 AM
Last Post: LahoreEstate
  PIA suffered Rs 76.54 billion loss till June 30: Mukhtar Naveed Yaseen 0 3,283 11-08-2009 06:43 AM
Last Post: Naveed Yaseen
  Former chairman Pak Steel caused Rs 22 billion loss by embezzlement: SC told Naveed Yaseen 0 3,311 10-31-2009 08:05 AM
Last Post: Naveed Yaseen
  Pakistan ranked 4th from the bottom in hunger index Naveed Yaseen 0 2,924 10-17-2009 05:40 AM
Last Post: Naveed Yaseen
  Rice procurement through PASSCO to cause Rs 12 billion loss to tax-payers Naveed Yaseen 0 3,281 10-13-2009 05:48 AM
Last Post: Naveed Yaseen
  Pak Steel posts Rs four billion loss in first quarter Naveed Yaseen 0 2,877 10-07-2009 05:30 AM
Last Post: Naveed Yaseen

Forum Jump:


User(s) browsing this thread: 1 Guest(s)