Reality of the KSE(cont'd)

The bull, the boom and fears of a bust

The rise of the KSE 100 Index has two aspects to it. First is the manner in which it is composed, and, second is the expectation of how major players in this composition are expected to perform in the future. Scores of related issues will play an important role on how this will unfold, but for the time being suffice it to say that we are stuck on the best-scenario assumption.

First the composition. The KSE 100 Index is composed of 100 companies selected on a performance criteria. Experts in the exchange are of the view that this is a highly skewed selection, biased towards the public sector players like the Oil & Gas Corporation, PTCL and PSO. These three are up for privatisation, and the rewards for the winners are going to be massive. Coupled with this is the assumption that once they are in private hands, they will perform even better. This is debatable to say the least, and given that we are a developing country the underlying assumptions of this argument need to be carefully studied.

But even given all these facts, the point remains that once they are privatised, the pickings will be large, and, therefore, investing in them now makes good sense. Lakhani has explained this well by saying: "Billions of rupees have shifted from fixed income instruments, where the returns are very meager, to the stock market, where the returns seem much more attractive". He informs that the savings in fixed income instruments like National Savings or bank fixed income products by 'pensioners, retired employees and senior citizens' are moving towards stocks in attractive scripts. These have a negative effect in that bank deposits have been hit, and that in order to attract depositors bank interest rates are rising, so investment is also becoming costlier. Interest rates have started to shoot up and entrepreneurs are alarmed. This has an inflationary effect, which is multiplier in nature.

So the poor and fixed income population, lets say 90 per cent of the people, have good reason to be worried. In February 2005 alone, the Federal Bureau of Statistics officially informs us, inflation was up by 9.95 per cent. This is very serious stuff, and the politicians in power are definitely trying to shift focus from this aspect of the national life. Prime Minister Shaukat Aziz tried his best to calm his audience in a meeting of the Federation of Pakistan Chambers of Commerce and Industry in Karachi last week by asserting that "business costs are still low in Pakistan compared to our neighbours". Amazing, but then he conceded to his 'shocked audience' that he did not include India in this comparison. Imagine. So much for honesty!

The composition of the KSE 100 Index is skewed enough to make it jump in hundreds once a major shift in share buying takes place in the top five scripts, they being the ones up for grabs in the privatisation process, which it seems will be finalised before September 2005. But the quicker they manage the better it will be for the markets, which after a crazy 'plot mania' have entered a crazier 'stock mania'. It is unsettling to say the least, and tends to disrupt the work that goes into stabilising the major indicators like the foreign reserves level, the export drive, the effort to keep interest rates at a low level, and most importantly, to peg inflation close to four to five per cent mark. It goes without saying that as far as inflation and interest rates go, we are beginning to see emerging failures that will have immense long-term impacts.

The rise and rise of the KSE 100 Index has managed to attract good money in search of quick profits, and this is something we must be wary of. The stock market is a 'very short-term' activity. The big boys move in, invest large sums, make a reasonable profit, and then move out. This is simple economic common sense. For example, if Rs 100 was invested on a Monday, and by Saturday, just five days later, the script climbed to Rs 100 only, it means that in this transaction the investor had made a 100 per cent per annum profit. So if the KSE 100 Index has doubled in just six months, why would not even bigger boys look Pakistan's way?

We have seen the major US entrepreneurs come to Karachi to set up camp, as also have the Chinese. Investment in our telecommunications, mining and other major infrastructure projects is growing at great speed. The chief of Merrill Lynch has been looking around and it is just possible that considerable investments in the stocks of the scripts that are to be privatised will be further picked up. One expert explains: "Before a major picking of the type Pakistan has to offer, in a way our last major assets that are being sold, the tactic is to pick up as much as is possible before a final decision. This will improve the bargaining position of the buyer, who will make a profit on the process itself, let alone the script'. That is why there is considerable sense in what is happening. The problem lies in the fact that there are a lot of entrepreneurs who are just not used to living in an 'unprotected' environment of the sort Pakistan is headed firmly towards. As one expert puts it: "When entrepreneurs become land speculators, no progress is possible. But they will be left far behind. After the KSE surge is over, land prices will fall no matter what the speculators say. They are already beginning to fall slowly. Now money must move to where the better profits exist, and that is in sensible enterprises run by professionals".

But this begs the questions 'what will happen after this crazy bullish period is over and the silver is sold to the highest bidder'? The answer simply is 'Nothing'. There will be a series of 'corrections', which mean that the KSE 100 Index will come to its natural position, where external and environmental factors will take over. This is only natural. Classical case studies of similar time periods on other nations shows that it depends on the degree of 'good governance' that is in place. The State Bank of Pakistan and, more importantly, the SECP have a major role to play in the days ahead. The former has to regulate the economy to keep interest rates and inflation under very firm control, to allow the economy to surge ahead, while the SECP has to make sure that businesses are run as tight ships. Here the role of government is critical. Investments in massive infrastructural works will have to take place if we are to grow at a two digit pace, which is the only way we will manage to remain competitive.